Question 1

Which of the following is not a characteristic of "perfect" markets?

Accepted Answer

A)   Buyers and sellers can transact with each other directly if transaction costs are set at an appropriate level.
B)   Securities are infinitely divisible.
C)   Buyers and sellers know the true quality of what they are buying and selling.
D)   All of the above are characteristics of perfect markets.E) B) and C)
F) B) and D)

Question 2

In the context of portfolio diversification,

Accepted Answer

A)   investors are compensated for diversifiable risk in the portfolio.
B)   prudent investors should hold about three to five stocks in their portfolio.
C)   a stock index mutual fund is a financial intermediary that offers small investors a way to participate in the performance of the stock market as a whole.
D)   financial intermediaries make it more difficult to be diversified.E) B) and D)
F) A) and D)

Question 3

In the early 1980s, many savings-and-loan associations pretended to be solvent by

Accepted Answer

A)   valuing their assets on a historical cost basis.
B)   underreporting the amount of their liabilities.
C)   including the impact of high interest rates on the value of their assets.
D)   counting "goodwill" as an asset.E) A) and B)
F) None of the above

Question 4

Banks still have a strong comparative advantage in extending __________ to __________ businesses.

Accepted Answer

A)   traded securities; small
B)   non-traded loans; small
C)   traded securities; large
D)   non-traded loans; largeE) B) and C)
F) A) and C)

Question 5

A rise in deposit rates, all else constant, __________ a bank's __________ risk.

Accepted Answer

A)   lowers; credit
B)   lowers; interest rate
C)   raises; credit
D)   raises; interest rateE) B) and C)
F) All of the above

Question 6

The problem of "asymmetric information" is that the

Accepted Answer

A)   lender knows more than the borrower.
B)   borrower knows more than the lender.
C)   borrower and lender have different goals.
D)   borrower and lender know the future much less than they do the present.E) B) and D)
F) C) and D)

Question 7

Which of the following is not true with respect to money market mutual funds?

Accepted Answer

A)   They allow small savers to pool their funds to buy a diversified portfolio of money market instruments.
B)   They often include securities such as Treasury bills, Treasury bonds, commercial paper, and negotiable CDs.
C)   They charge a small management fee.
D)   Most funds offer limited withdrawal by check.E) B) and C)
F) C) and D)

Question 8

Asymmetric information occurs when

Accepted Answer

A)   buyers and sellers are not equally informed about the true quality of what they are buying and selling.
B)   banks face an adverse selection problem with their borrowers.
C)   borrowers covertly engage in activities that increase the probability of poor performance.
D)   All of the above.E) B) and C)
F) All of the above

Question 9

If a banker lacks enough information to determine exactly which applicants for a loan are good risks and which are bad risks, then he faces a(n) __________ problem.

Accepted Answer

A)   moral hazard
B)   adverse selection
C)   market failure
D)   disintermediationE) A) and B)
F) A) and D)

Question 10

In the 1960s, banks started issuing negotiable CDs in order to

Accepted Answer

A)   offer higher interest rates than they were allowed to on deposits.
B)   lower information costs.
C)   appeal more to the small borrower.
D)   lend in the direct finance market.E) A) and B)
F) A) and C)

Question 11

Most bank loans are __________ maturity by the bank because of the __________ in monitoring how the borrower maintains his obligations.

Accepted Answer

A)   held to; ease
B)   held to; difficulty
C)   sold before; ease
D)   sold before; difficultyE) A) and D)
F) All of the above

Question 12

One type of financial intermediary now rising in relative importance is

Accepted Answer

A)   pension funds.
B)   banks.
C)   savings-and-loan associations (S&Ls) .
D)   life insurance companies.E) B) and C)
F) B) and D)

Question 13

"Information problematic" borrowers must usually go the __________ finance route and issue __________ securities.

Accepted Answer

A)   direct; traded
B)   direct; nontraded
C)   indirect; traded
D)   indirect; nontradedE) All of the above
F) B) and C)

Question 14

A wave of bank failures in the United States

Accepted Answer

A)   occurred in the 1970s.
B)   occurred from the early 1980s to the early 1990s.
C)   occurred from late 1980s to the mid 1990s.
D)   has been ongoing since the late 1980s.E) A) and B)
F) All of the above

Question 15

The general perception in the early 1980s was the S&Ls were not in serious trouble, partly because S&Ls were insured by the

Accepted Answer

A)   Securities and Exchange Commission (SE
C)  .
B)   U.S. Treasury.
C)   Federal Deposit Insurance Corporation.
D)   Federal Savings and Loan Insurance Corporation (FSLIE) C) and D)
F) None of the above

Question 16

Another term for "don't put all your eggs in one basket" is

Accepted Answer

A)   moral hazard.
B)   indirect finance.
C)   asymmetric information.
D)   portfolio diversification.E) All of the above
F) A) and D)

Question 17

In the early 1980s, rising interest rates caused a tremendous __________ in the value of savings-and-loan __________.

Accepted Answer

A)   inflow; liabilities
B)   inflow; assets
C)   outflow; liabilities
D)   outflow; assetsE) A) and D)
F) B) and C)

Question 18

In the 1980s, banks __________ the amount of highly speculative loans they were holding due to __________ deposit rates.

Accepted Answer

A)   increased; rising
B)   increased; falling
C)   decreasing; rising
D)   decreased; fallingE) A) and B)
F) B) and D)

Question 19

Which of the following are not thrift institutions?

Accepted Answer

A)   Savings and loan associations (S&Ls) 
B)   Mutual savings banks
C)   Money market mutual funds
D)   Credit unionsE) All of the above
F) C) and D)

Question 20

If the problem of asymmetric information is so serious that a lender chooses not to lend to any potential small business borrower, then the problem is

Accepted Answer

A)   moral hazard.
B)   adverse selection.
C)   market failure.
D)   disintermediation.E) None of the above
F) C) and D)

Exam 11: The Nature of Financial Intermediation

The general perception in the early 1980s was the S&Ls were not in serious trouble, partly because S&Ls were insured by the

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Which of the following is not a characteristic of "perfect" markets?

Correct AnswerverifiedShow Answer

"Information problematic" borrowers must usually go the __________ finance route and issue __________ securities.

Correct AnswerverifiedShow Answer

In the 1960s, banks started issuing negotiable CDs in order to

Correct AnswerverifiedShow Answer

In the 1980s, banks __________ the amount of highly speculative loans they were holding due to __________ deposit rates.

Correct AnswerverifiedShow Answer

Another term for "don't put all your eggs in one basket" is

Correct AnswerverifiedShow Answer

A wave of bank failures in the United States

Correct AnswerverifiedShow Answer

The problem of "asymmetric information" is that the

Correct AnswerverifiedShow Answer

If the problem of asymmetric information is so serious that a lender chooses not to lend to any potential small business borrower, then the problem is

Correct AnswerverifiedShow Answer

Which of the following are not thrift institutions?

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In the context of portfolio diversification,

Correct AnswerverifiedShow Answer

In the early 1980s, many savings-and-loan associations pretended to be solvent by

Correct AnswerverifiedShow Answer

Which of the following is not true with respect to money market mutual funds?

Correct AnswerverifiedShow Answer

If a banker lacks enough information to determine exactly which applicants for a loan are good risks and which are bad risks, then he faces a(n) __________ problem.

Correct AnswerverifiedShow Answer

In the early 1980s, rising interest rates caused a tremendous __________ in the value of savings-and-loan __________.

Correct AnswerverifiedShow Answer

One type of financial intermediary now rising in relative importance is

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Banks still have a strong comparative advantage in extending __________ to __________ businesses.

Correct AnswerverifiedShow Answer

A rise in deposit rates, all else constant, __________ a bank's __________ risk.

Correct AnswerverifiedShow Answer

Asymmetric information occurs when

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Most bank loans are __________ maturity by the bank because of the __________ in monitoring how the borrower maintains his obligations.

Correct AnswerverifiedShow Answer

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"Information problematic" borrowers must usually go the finance route and issue securities.

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In the 1980s, banks the amount of highly speculative loans they were holding due to deposit rates.

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In the early 1980s, rising interest rates caused a tremendous in the value of savings-and-loan .

Correct Answer
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Banks still have a strong comparative advantage in extending to businesses.

Correct Answer
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A rise in deposit rates, all else constant, a bank's risk.

Correct Answer
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Most bank loans are maturity by the bank because of the in monitoring how the borrower maintains his obligations.

Correct Answer
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