The _______ is designed to finance long-term investments, making possible the

construction of factories, office buildings, highways, bridges, schools, homes,

INCORRECT and apartments.

A)money market
B)capital market
C)secondary market
D)negotiated market
E)primary market

Providing loanable funds to supplement current income in order to sustain

2 INCORRECT
current living standards represents what financial service area?
A)payments services
B)thrift services
C)agency services
D)credit services
E)none of the above

3 INCORRECT Trading in securities previously issued takes place in the:

A)open market
B)secondary market
C)primary market
D)negotiated market
E)capital market

The financial system and financial markets are responsible for providing which
4 INCORRECT
of the following services?
A)Credit services
B)Payment services
C)Liquidity
D)Facilitating the flow of savings
E)All of the above

A(n) _____ market exists if the market is fully competitive and the same
5 CORRECT
information is available to all participants.
A)primary
B)secondary
C)perfect
D)imperfect
E)neutral

6 INCORRECT The role of markets in a market-oriented economy like the United States is to:

A)allocate resources.
B)distribute income.
 C)produce needed goods and services.
D)all of the above.
E)none of the above.

The financial service supplied by the money and capital markets in which
7 INCORRECT financial instruments are created to attract savings for future financial needs is
called:
A)agency services
B)credit services
C)payments services
D)thrift services
E)none of the above

When different sets of information are available to different participants in the

8 CORRECT
market, we say that there is:
A)arbitrage
B)asymmetric information
C)a hedging market
D)a brokered market
E)collusion

9 CORRECT The circular flow of funds includes which of the following:

A)consumer units
B)households
C)government
D)all of the above
E)none of the above

The ______ is designed for the making of short-term loans where individuals
10 INCORRECT and institutions with temporary surpluses of funds meet borrowers who have
temporary cash shortages.
A)money market
B)capital market
C)open market
D)negotiated market
E)primary market

11 INCORRECT The financial system determines:

A)the cost of credit

B)how much credit is available
C)the prices of securities
D)the quantity of securities issued by borrowers
E)all of the above.

12 INCORRECT To gain access to the money market an institution must:

 A)have an excellent credit rating
B)be well known
C)be large
D)all of the above
E)none of the above

13 INCORRECT The largest market in the world for a single security is:

A)the capital market

B)the money market
C)the treasury bill market
D)the federal funds market
E)none of the above

A market in which competition among buyers and sellers sets the terms of
14 INCORRECT
trade is a:
A)primary market
B)forward market
C)efficient market
D)perfect market
E)none of the above

15 CORRECT The financial system provides all the following services except:

A)furnish credit
B)payment services
C)equitably distribute wealth
D)provide liquidity
E)risk protection

16 INCORRECT According to your text, a key trend in the financial system is:

A)increasing competition
B)greater risk
C)growth of technology
D)growth of debt
E)all of the above are key trends for the financial system

17 INCORRECT Which type of market is not part of the circular flow?

A)Factor market
B)Information market
C)Financial market
D)Product market
E)All of the above

Acting as an agent for a customer in managing retirement funds or other

18 INCORRECT
property represents what financial service area?
 A)hedging services
B)credit services
C)thrift services
D)insurance
E)none of the above

The form of market efficiency in which assets are priced efficiently based on the
past history of prices and all current assets' prices reflect fully the past history
19 INCORRECT
of information about the assets to which those prices are attached is known as:
a weak form market efficiency
A)semi-strong form efficiency
B)strong form efficiency
C)market perfection
D)none of the above

One of the financial markets listed below is not part of the nation's capital
20 INCORRECT
market. Which one is not?
A)Mortgage market
B)Corporate bond market
C)Municipal bond market
D)Commercial paper market
E)Stock market

According to the textbook, a new form of disintermediation has appeared in

1 INCORRECT
recent years in which:
A)financial intermediaries sell of some of their loans in order to raise new
capital
B)financial intermediaries develop new types of deposits not previously
available and thereby add to their capital base
C)some of the best borrowing customers of financial intermediaries have
recently chosen to raise funds directly from the open market
D)a and c are both correct
E)none of the above

Investment companies (sometimes called mutual funds) are classified as,

2 INCORRECT
according to the textbook:
A)depository institutions
B)contractual institutions
C)investment institutions
D)stock savings institutions
E)none of the above

3 INCORRECT Savings accounts at banks and shares in money market mutual funds are:

A)financial assets but not liabilities

B)debts giving rise to financial assets
 C)real assets
D)equal to total financial assets in a financial system
E)none of the above

4 CORRECT According to the text, pension funds are classified as:

A)depository institutions
B)contractual institutions
C)investment institutions
D)investment mutuals
E)none of the above

ITT decides to use receivables as collateral for debt it issues rather than borrow
5 INCORRECT
from the bank. This is an example of:
A)asset reduction
B)arbitrage
C)hedging
D)indirect finance
E)disintermediation

6 INCORRECT An increased quantity of real assets leads to:

A)an increased quantity of goods and services

B)an increased volume of financial assets
C)an increased volume of liabilities
D)a more efficient financial system
E)an increased net worth for business

7 INCORRECT The government sector in the economy usually is a :

A)balanced-budget sector
B)surplus-budget sector
C)deficit-budget sector
D)financially neutral sector
E)none of the above

Savings banks are classified as one of the following types of financial institutions.
8 INCORRECT
Which one?
A)Commercial banking firms
B)Credit Unions
C)Contractual institutions
D)Investment institutions
E)none of the above

9 CORRECT According to the textbook, savings and loan associations are classified as:

A)depository institutions
B)contractual institutions
 C)investment institutions
D)short-term intermediaries
E)none of the above

For the most part secondary securities issued by financial intermediaries share all
10 CORRECT
of the following characteristics except one. Identify which one.
A)Low risk
B)Long maturity
C)Small denominations
D)Liquidity
E)Convenience

The smallest measure of the U.S. money supply that includes small savings and
11 INCORRECT
time deposits (under $100,000 each in amount) is known as:
A)M1
B)M2
C)M3
D)L
E)none of the above

Disintermediation ______ the dependence of corporations and individuals on

12 INCORRECT
financial institutions.
A)increases
B)reduces
C)has no effect on
D)the effect depends on the level of interest rates
E)none of the above

The withdrawal of funds from a financial intermediary by ultimate lenders

13 INCORRECT
(savers) and the lending of those funds to ultimate borrowers is called:
A)diversification
B)indirect finance
C)disintermediation
D)internal finance
E)none of the above

According to the text, the secondary securities issued by financial intermediaries

14 INCORRECT include all of the following items except one. Which is not normally a secondary
security?
A)Checking accounts
B)Insurance policies
C)Retirement plans
D)Savings deposits
E)Corporate bonds

15 INCORRECT Which of the following statements about financial assets is usually not true?

A)Serve as a store of value

 B)Cannot be depreciated
C)Physical condition or form important in determining their value
D)Little or not value as a commodity
E)Easily stored and transported

A ______ executes the sell order, while a ______ may buy the securities from
16 INCORRECT
the seller.
A)arbitrageur, speculator
B)dealer, speculator
C)arbitrageur, broker
D)broker, dealer
E)dealer, broker

U.S. savings bonds would be an example of what kind of financial asset (as
17 INCORRECT
defined in the textbook)?
A)Money
B)Equities
C)Negotiable debt
D)Nonnegotiable debt
E)none of the above

18 INCORRECT According to the text, the most important financial asset in the economy is:

A)money
B)common stock
C)mortgages
D)savings deposits in banks and credit unions
E)government bonds

Credit unions are classified as what type of financial institution, according to the
19 CORRECT
textbook?
A)depository institutions
B)contractual institutions
C)investment institutions
D)stockholder-owned savings institutions
E)none of the above

There is a term missing from the identity shown below: Expenditures out of
Current Income – Current Income Receipts = Change in Holdings of Debt and
20 INCORRECT
Equity During the Current Period ______. Which of the terms shown below
correctly completes the identity above?
A)Change in holdings of real and financial assets during the current
period
B)Change in holdings of real assets during the current period
C)Change in holdings of financial assets during the current period
D)Change in net worth during the current period
E)none of the above

 Question 1

1 out of 1 points

According to your text, the basic commodity being traded in all the financial markets is:
Answer
Selected Answer:
Credit
Correct Answer:
Credit

 Question 2

1 out of 1 points

Net wealth for an economic unit equals:

Answer
Selected Answer:
Total assets minus total liabilities
Correct Answer:
Total assets minus total liabilities

 Question 3

1 out of 1 points

Wealth created income results in:

Answer
Selected Answer:
B&D
Correct Answer:
B&D

 Question 4

1 out of 1 points

According to your text, the nation's standard of living is increased through the
mechanism of the financial system by:
 Answer
Selected Answer:
Making funds available
Correct Answer:
Making funds available

 Question 5

1 out of 1 points

At the end of last year the wealth was $48,000, with a return on the accumulated wealth
was 2% during this year and $1700 was saved this year. At the end of this year the
accumulated wealth is:
Answer
Selected Answer:
$50,660
Correct Answer:
$50,660

 Question 6

1 out of 1 points

In the financial marketplace, secondary markets provide:

Answer
Selected Answer:
A&C
Correct Answer:
A&C

 Question 7

1 out of 1 points

For any business, individual or government, wealth is:

Answer
Selected Answer:
A, B, & C
Correct Answer:
 A, B, & C

 Question 8

1 out of 1 points

According to the text speculators perform an important function in the financial markets.
They:
Answer
Selected Answer:
Level out the prices of securities
Correct Answer:
Level out the prices of securities

 Question 9

1 out of 1 points

A(n) _____ market exists if the market is fully competitive and the same information is
available to all participants.
Answer
Selected Answer:
Perfect
Correct Answer:
Perfect

 Question 10

1 out of 1 points

The largest market in the world for a single security is:

Answer
Selected Answer:
The treasury bill market
Correct Answer:
The treasury bill market

 Question 11

1 out of 1 points
 _____ risk refers to the risk that you will not receive securities that you have purchased
or that you will not receive payment for securities you have sold.
Answer
Selected Answer:
Settlement
Correct Answer:
Settlement

 Question 12

1 out of 1 points

Every year the volume of financial wealth is growing in the United States. In 2006 the
total securities, deposits and other financial assets held by domestic nonfinancial
businesses, households, the US government and foreign investors was
Answer
Selected Answer:
$66 trillion
Correct Answer:
$66 trillion

 Question 13

1 out of 1 points

The financial system determines:

Answer
Selected Answer:
All of the above
Correct Answer:
All of the above

 Question 14

1 out of 1 points

The role of markets in a market-oriented economy like the United States is to:
Answer
Selected Answer:
All of the above
 Correct Answer:
All of the above

 Question 15

1 out of 1 points

The financial system and financial markets are responsible for providing which of the
following services?
Answer
Selected Answer:
All of the above
Correct Answer:
All of the above

 Question 16

1 out of 1 points

The ______ is designed to finance long-term investments, making possible the

construction of factories, office buildings, highways, bridges, schools, homes and
apartments.
Answer
Selected Answer:
Capital market
Correct Answer:
Capital market

 Question 17

1 out of 1 points

A bank certificate of deposit is a ______ market instrument. Commercial paper is a

______ market instrument.
Answer
Selected Answer:
Money, money
Correct Answer:
Money, money
 Question 18

1 out of 1 points

A household which consumes assets or increases debt during the year is a condition
sometimes referred to as:
Answer
Selected Answer:
Negative savings
Correct Answer:
Negative savings

 Question 19

1 out of 1 points

The market for trading newly issued securities is known as the:

Answer
Selected Answer:
Primary market
Correct Answer:
Primary market

 Question 20

1 out of 1 points

The ______ is designed for the making of short-term loans where individuals and
institutions with temporary surpluses of funds meet borrowers who have temporary cash
shortages.
Answer
Selected Answer:
Money market
Correct Answer:
Money market

1INCORRECT Under the efficient markets hypothesis (EMH) each asset's fundamental
value will vary with the:
A)ratio of expected return to risk

B)size of the asset

C)cost of information about the asset

D)state of the world

E)none of the above

2INCORRECT The statement "Investors who trade using publicly available information
should expect to earn normal profits" best reflects the:

A)adverse selection hypothesis

B)information asymmetries hypothesis

C)weak form of the efficient market hypothesis

D)semi-strong form of the efficient market hypothesis

E)strong form of the efficient market hypothesis

3INCORRECT According to the _____ an asset's current price is the best estimate of
that asset's expected fundamental value.

A)Asymmetric information theory

B)Efficient markets hypothesis

C)Adverse selection theory

D)Random assets theory

E)none of the above

4CORRECT As a student, you live from paycheck to paycheck. In deciding where to

open a checking account, you look for the bank which requires a low minimum balance
even though it might charge higher per check fees. This is an example of:

A)adverse selection

B)the lemons problem

C)efficient markets

D)perfect information

E)none of the above

5INCORRECT According to the efficient markets hypothesis (EMH) any deviation of

actual returns from the expected returns on financial assets lying along the SML should
be:

A)Large and statistically significant

B)Quickly eliminated

C)Apparent to all investors at negligible cost

D)Fully explained by the arrival of new information

E)none of the above

6INCORRECT The discovery of a financial asset whose expected return is above or

below the security market line (SML) would be a signal of:

A)Higher or lower risk depending upon the size of the expected return

B)Market efficiency at work

C)The presence of market inefficiency

D)Temporary overpricing

E)none of the above

7INCORRECT One of the most complete listings of daily price and yield quotations on
securities appears in:

A)Survey of Current Business

B)Stock Reports

C)Monetary Trends

D)Wall Street Journal

E)Value Line Investment Survey

8INCORRECT Data from the Flow of Funds Accounts are reported in the:

A)Survey of Current Business

B)U.S. Financial Data

C)Federal Reserve Bulletin

D)Monetary Trends

E)National Economic Trends

F)Moody's Bank and Finance Manual

G)none of the above are sources of Flow-of-Funds data

9INCORRECT The statement "Investors who use insider information may earn excess
profits" best reflects the:

A)adverse selection hypothesis

B)information asymmetries hypothesis

C)weak form of the efficient market hypothesis

D)semi-strong form of the efficient market hypothesis

E)strong form of the efficient market hypothesis

10INCORRECT Price quotations on individual stocks may be found in all but one of the
following published sources. Which source shown below does not contain individual
stock price quotations?

A)Wall Street Journal

B)Survey of Current Business

C)Value Line Investment Survey

D)S&P Daily Stock Price Record

E)All of the above are sources of price quotations on individual stocks

11INCORRECT Periodic reports by security dealers showing market prices, yields, and
amounts held of various securities are known as:

A)registration statements.

B)quote sheets.

C)daily market diaries.

D)spread sheets

E)security information reports

12INCORRECT Please complete the following statement: Net Investment in Plant and
Equipment = Net Increase in Liabilities + ___ - ___. The items which correctly complete
the above statement in proper order are:

A)net real investment, net current saving

B)net financial investment, net borrowing

C)net current saving, net acquisitions of financial assets

D)net financial investment, net current saving

E)none of the above correctly complete the statement in proper order

13INCORRECT Moral hazard is a problem that can arise between management (agents)
and stockholders (principals) because:

A)information detailing the inner workings of a firm is often difficult and expensive to obtain

B)management owns too much stock in the firm

C)shareholders have too much self-interest

D)insider trading is illegal

14INCORRECT Financial information on individual security issuers may be obtained

from:

A)Moody's Investors Service

B)Dun & Bradstreet

C)Securities and Exchange Commission

D)Standard & Poor's

E)All of the above sources contain information on individual security issuers

15INCORRECT Several types of financial statements are presented in the Flow of Funds
Accounts. Which item below is not a financial statement presented in the Federal
Reserve's Flow of Funds Accounts?
A)Balance sheet for each sector

B)Sector Statement of Revenues and Expenses

C)Sector Sources and Uses of Funds Statement

D)Flow of Funds Matrix for the Entire Economy

E)All of the above statements are prepared and presented in the Flow of Funds Accounts

16CORRECT The line or curve described by the equation E(Ri) = rf + βi[E(Rm) - rf] is
known as the:

A)Security market line

B)Risk-reward ratio curve

C)Expected risk relationship

D)Efficient Markets tradeoff equation

E)none of the above

17INCORRECT Yields and prices on individual bond issues may be found in all of the
following published sources but one. Which one does not contain such information?

A)Daily Bond Buyer

B)Wall Street Journal

C)Commercial and Financial Chronicle

D)U.S. Financial Data

E)All of the above are sources of yields and prices on individual bond issues

18INCORRECT Insiders can use privileged information legally if:

A)no one is injured as a result of their actions

B)the firm's board of directors approves

C)the information is released to the public before securities are traded

D)any profits are donated to charity

19CORRECT The optimal forecast of next period's market value (price) for an asset
when we know only this period's information must be the asset's

A)intrinsic value

B)current price

C)risk level

D)tradeable value

E)none of the above

20CORRECT If a household sells stock to another household, this transaction will:

A)not be picked up in the Flow of Funds Accounts

B)be recorded in the balance sheet and sources and uses of funds statement of the household
sector

C)be recorded under corporate equities in the Flow of Funds Matrix

D)not be recorded in the Flow of Funds Matrix, but will appear on the household sector's
balance sheet

E)none of the above

Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones)

Chapter 3 Depository Institutions: Activities and Characteristics

Multiple Choice Questions

1 Asset/Liability Problem of Depository Institutions

1) Which of the below statements is TRUE?

A) A depository institution seeks to earn a positive spread between the assets it invests in
(deposits and other sources) and the cost of its funds (loans and securities).
B) Interest rate risk refers to the risk that a borrower will default on a loan obligation to
the depository institution or that the issuer of a security that the depository institution
holds will default on its obligation
C) Regulatory risk is the risk that regulators will change the rules so as to adversely
impact the earnings of the institution.
D) If the spread will be positive, it will cost the depository institution more to finance the
government securities than it will earn on the funds invested in those securities.
Answer: C
Comment: A depository institution seeks to earn a positive spread between the assets it
invests in (loans and securities) and the cost of its funds (deposits and other sources).
Credit risk, also called default risk, refers to the risk that a borrower will default on a
loan obligation to the depository institution or that the issuer of a security that the
depository institution holds will default on its obligation. If the spread will be negative, it
will cost the depository institution more to finance the government securities than it will
earn on the funds invested in those securities.
Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.1 the role of depository institutions

2) Which of the below statements is FALSE?

A) Absent from any balance sheet of a depository institution is interest rate risk exposure.
B) Managers must be willing to accept some exposure, but they can take various
measures to address the interest rate sensitivity of the institution's liabilities and its assets.
C) Regulators impose restrictions on the degree of interest rate risk a depository
institution may be exposed to.
D) A depository institution will have an asset/liability committee that is responsible for
monitoring the interest rate risk exposure.
Answer: A
Comment: Inherent in any balance sheet of a depository institution is interest rate risk
exposure.
Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.1 the role of depository institutions
3) Which of the below statements is TRUE?
A) Depository institutions do not include commercial banks (or simply banks), savings
and loan associations (S&Ls), savings banks, and credit unions.
B) Since their funds are raised through deposits and other funding sources, depository
institutions cannot make direct loans to various entities or invest in securities.
C) Depository institutions derive their income from two sources: (1) the income
generated from the loans they make and the securities they purchase, and (2) fee income.
D) It is uncommon to refer to S&Ls, savings banks, and credit unions as thrifts, which are
specialized types of depository institutions.
Answer: C
Comment: Depository institutions include commercial banks (or simply banks), savings
and loan associations (S&Ls), savings banks, and credit unions. All are financial
intermediaries that accept deposits. These deposits represent the liabilities (debt) of the
deposit-accepting institution. With the funds raised through deposits and other funding
sources, depository institutions both make direct loans to various entities and invest in
securities. It is common to refer to S&Ls, savings banks, and credit unions as thrifts,
which are specialized types of depository institutions.
Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.2 how a depository institution generates income

4) Which of the below statements is FALSE?

A) At one time, thrifts were permitted to accept deposits transferable by check
(negotiable), or, as they are more popularly known, checking accounts.
B) Depository institutions are highly regulated because of the important role that they
play in the country's financial system.
C) Demand deposit accounts are the principal means that individuals and business entities
use for making payments, and government monetary policy is implemented through the
banking system.
D) Securities held for the purpose of satisfying net withdrawals and customer loan
demands
are sometimes referred to as secondary reserves.
Answer: A
Comment: At one time, thrifts were not permitted to accept deposits transferable by
check (negotiable), or, as they are more popularly known, checking accounts.
Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.2 how a depository institution generates income
5) Depository institutions are ________ because of the important role that they play in
the country's financial system.
A) lowly regarded
B) highly regulated
C) highly deregulated
D) lowly regulated
Answer: B
Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.1 the role of depository institutions

6) Because of their important role, ________ are afforded special privileges such as
access to federal deposit insurance and access to a government entity that provides funds
for liquidity or emergency needs..
A) NOW accounts
B) repository institutions
C) depository invitations
D) depository institutions
Answer: D
Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.4 the asset/liability problem all depository institutions face

2 Commercial Banks

1) Prior to 1863, banks were regulated only at the ________ level.

A) local
B) state
C) federal
D) international
Answer: B
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.5 who regulates commercial banks and thrifts and the types of regulations
imposed

2) Realizing the need for banks to obtain liquidity during periods of economic stress, the
federal government wanted to establish a banking system that would have an entity that
banks could borrow from. The U.S. Congress accomplished this with the passage of the
________.
A) National Bank Act in 1863
B) Office of the Comptroller of the Currency Act
C) Federal Reserve Act of 1913
D) Financial Institutions Reform, Recovery, and Enforcement Act of 1989
Answer: C
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.5 who regulates commercial banks and thrifts and the types of regulations
imposed
3) In our financial system, commercial banks provide numerous services that can be
broadly classified. Which of the below is NOT one of these broadly classified services?
A) individual banking
B) forthright banking
C) institutional banking
D) global banking
Answer: B
Comment: The services can be broadly classified as follows: (1) individual banking, (2)
institutional banking, and (3) global banking.
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

4) Which of the below statements is FALSE?

A) Interest income and fee income are generated from mortgage lending and credit card
financing.
B) Fee income is generated from brokerage services and financial investment services.
C) Loans to nonfinancial corporations, financial corporations, (such as life insurance
companies), and government entities (state and local governments in the United States
and foreign governments) fall into the category of institutional banking.
D) Loans and leasing generate dividend income, and other services that banks offer
institutional customers generate fee income.
Answer: D
Comment: Loans and leasing generate interest income, and other services that banks
offer institutional customers generate fee income.
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

5) Most global banking activities generate ________ rather than ________.

A) dividend income; interest income
B) fee income; dividend income
C) interest income; fee income
D) fee income; interest income
Answer: D
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts
6) The three sources of funds for banks are ________.
A) salaries, nondeposit borrowing, common stock, and retained earnings.
B) deposits, nondeposit borrowing, common stock, and retained earnings.
C) deposits, salaries and wages, common stock, and retained earnings.
D) deposit borrowing, bonds, and retained earnings.
Answer: B
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

7) Risk-based capital guidelines establish a ________ weight for all assets where a
weight depends on the credit risk associated with each asset.
A) commercial bank risk
B) scientific-based
C) credit risk
D) guideline-based
Answer: C
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.7 the capital requirements imposed on commercial banks and savings and
loan associations

8) Which of the below statements is FALSE?

A) Risk-based capital guidelines establish a credit risk weight for all assets where a
weight depends on the credit risk associated with each asset.
B) There are four credit risk classifications for banks: 0%, 20%, 50%, and 100%, arrived
at on no particular scientific basis.
C) The purpose of the Basel I Framework was to improve on the rules as set forth in the
Basel I Framework by bringing risk-based capital requirements more in line with the
underlying risks to which banks are exposed.
D) The Basel Committee has several subcommittees whose stated purpose is to promote
consistency in its implementation of the guidelines.
Answer: C
Comment: The purpose of the Basel II Framework was to improve on the rules as set
forth in the Basel I Framework by bringing risk-based capital requirements more in line
with the underlying risks to which banks are exposed.
Diff: 2
Topic: 3.2 Commercial Banks
Objective: 3.8 what is the Basel I and Basel II frameworks
3 Savings and Loan Associations

1) ________ means that there is no stock outstanding, so technically the depositors are
the owners.
A) S&L owned
B) Institutionally owned
C) Corporate stock ownership
D) Mutually owned
Answer: D
Diff: 2
Topic: 3.3 Savings and Loan Associations
Objective: 3.6 the funding sources available to commercial banks and thrifts

2) As the structures of S&L balance sheets and the consequent maturity mismatch led to
widespread disaster, the Garn-St. Germain Act of 1982 expanded the types of assets in
which S&Ls could invest. The acceptable list of investments now includes ________.
A) consumer loans .
B) nonconsumer loans.
C) municipal securities.
D) All of these
Answer: D
Diff: 2
Topic: 3.3 Savings and Loan Associations
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions

3) Traditionally, the only assets in which S&Ls were allowed to invest include ________.
A) mortgages, mortgage-backed securities, and foreign enterprises
B) mortgages, mortgage-backed securities and U.S. government securities.
C) mortgage-backed securities, non-U.S. government securities and mortgages.
D) mortgages, foreign securities and U.S. government securities.
Answer: B
Comment: Traditionally, the only assets in which S&Ls were allowed to invest have
been mortgages, mortgage-backed securities, and U.S. government securities. Mortgage
loans include fixed-rate mortgages, adjustable-rate mortgages, and other types of
mortgage designs. While most mortgage loans are for the purchase of homes, S&Ls do
make construction loans.
Diff: 2
Topic: 3.3 Savings and Loan Associations
Objective: 3.4 the asset/liability problem all depository institutions face
4) S&Ls invest in short-term assets for ________.
A) liquidity and non-regulatory purposes.
B) long-term and regulatory purposes.
C) operational and regulatory purposes.
D) operational and illiquidity purposes.
Answer: C
Comment: S&Ls invest in short-term assets for operational (liquidity) and regulatory
purposes.
Diff: 2
Topic: 3.3 Savings and Loan Associations
Objective: 3.4 the asset/liability problem all depository institutions face

5) The Garn-St. Germain Act, not only granted thrifts the right to offer money market
demand accounts so that S&Ls could compete with money market funds, but also
________ the types of assets in which S&Ls could invest.
A) limited
B) shortened
C) broadened
D) maintained
Answer: C
Diff: 2
Topic: 3.3 Savings and Loan Associations
Objective: 3.2 how a depository institution generates income

6) Which of the below statements is FALSE?

A) There are two sets of capital adequacy standards for S&Ls as for banks.
B) Until the early 2000s, S&Ls and all other lenders financed housing through traditional
mortgages at interest rates fixed for the life of the loan.
C) For S&Ls, if interest rates rise above the interest rate on the mortgage loan, a negative
spread will result, which must result eventually in insolvency.
D) With the high volatility of interest rates in the 1970s, followed by the historically high
level of interest rates in the early 1980s, all depository institutions began to lose funds to
competitors exempt from ceilings, such as the newly formed money market funds; this
development forced some increase in ceilings.
Answer: B
Comment: Until the early 1980s, S&Ls and all other lenders financed housing through
traditional mortgages at interest rates fixed for the life of the loan.
Diff: 2
Topic: 3.3 Savings and Loan Associations
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions
4 Savings Banks

1) ________ are institutions similar to, although much older than, S&Ls.
A) Federal Reserve Banks
B) Partnerships
C) Corporations
D) Savings banks
Answer: D
Comment: The asset structures of savings banks and S&Ls are similar.
Diff: 1
Topic: 3.4 Savings Banks
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions

2) The principal source of funds for savings banks is ________.

A) government bail-out funds.
B) withdrawals.
C) venture capital.
D) deposits.
Answer: D
Comment: The asset structures of savings banks and S&Ls are similar.
Diff: 1
Topic: 3.4 Savings Banks
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions

3) In comparing savings banks and S&Ls, which of the below comparisons is FALSE?
A) Although the total deposits at savings banks are less than those at S&Ls, savings
banks are typically larger institutions.
B) Asset structures of savings banks are always greater than S&Ls.
C) Because states have permitted more portfolio diversification than was permitted by
federal regulators of S&Ls, savings bank portfolios weathered funding risk far better than
S&Ls.
D) Typically, the ratio of deposits to total assets is greater for savings banks than for
S&Ls.
Answer: B
Comment: The asset structures of savings banks and S&Ls are similar.
Diff: 2
Topic: 3.4 Savings Banks
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions
5 Credit Unions

1) Technically, because credit unions are ________ by their members, member deposits
are called ________.
A) managed; certificates
B) owned; certificates
C) managed; shares
D) owned; shares
Answer: D
Diff: 2
Topic: 3.5 Credit Unions
Objective: 3.6 the funding sources available to commercial banks and thrifts

2) Credit union assets consist of ________.

A) small consumer loans, residential mortgage loans, and securities.
B) large consumer loans, residential mortgage loans, and securities.
C) small consumer loans, business mortgage loans, and securities.
D) small consumer loans, residential auto loans, and securities.
Answer: A
Diff: 2
Topic: 3.5 Credit Unions
Objective: 3.6 the funding sources available to commercial banks and thrifts

3) Since 1970, the shares of all federally chartered credit unions have been insured by the
________.
A) Central Liquidity Facility
B) National Credit Union Administration
C) U.S. Central Credit Union
D) National Credit Union Share Insurance Fund
Answer: D
Diff: 1
Topic: 3.5 Credit Unions
Objective: 3.1 the role of depository institutions

True/False Questions

1 Asset/Liability Problem of Depository Institutions

1) Besides facing credit risk and interest rate risk, a depository institution must be
prepared to satisfy withdrawals of funds by depositors and to provide loans to customers.
Answer: TRUE
Diff: 1
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.1 the role of depository institutions
2) A depository institution can accommodate withdrawal and loan demand by attracting
additional deposits and raising short-term funds in the money market.
Answer: TRUE
Diff: 1
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.2 how a depository institution generates income

3) Selling securities that it owns, requires that the depository institution invest a portion
of its funds in securities that are both illiquid and have a lot of price risk.
Answer: FALSE
Comment: Selling securities that it owns, requires that the depository institution invest a
portion of its funds in securities that are both liquid and have little price risk.
Diff: 1
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.2 how a depository institution generates income

4) By interest rate risk, we refer to the prospect that the selling price of the security will
be less than its purchase price, resulting in a loss.
Answer: FALSE
Comment: By price risk, we refer to the prospect that the selling price of the security
will be less than its purchase price, resulting in a loss.
Diff: 1
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.2 how a depository institution generates income

2 Commercial Banks

1) Demand deposits pay interest, typically below market interest rates; do not have a
specific maturity; and, usually can be withdrawn upon demand.
Answer: FALSE
Comment: Savings deposits pay interest, typically below market interest rates, do not
have a specific maturity, and usually can be withdrawn upon demand
Diff: 1
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

2) Savings deposits (checking accounts) pay no interest and can be withdrawn upon
demand.
Answer: FALSE
Comment: Demand deposits (checking accounts) pay no interest and can be withdrawn
upon demand.
Diff: 1
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts
3) Time deposits, also called certificates of deposit, have a fixed maturity date and pay
either a fixed or floating interest rate.
Answer: TRUE
Diff: 1
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

4) All banks must maintain a specified percentage of their deposits in a non-interest-

bearing account at one of the twelve Federal Reserve Banks. These specified percentages
are called required reserves, and the dollar amounts based on them that are required to be
kept on deposit at a Federal Reserve Bank are called reserve ratios.
Answer: FALSE
Comment: All banks must maintain a specified percentage of their deposits in a non-
interest-bearing account at one of the twelve Federal Reserve Banks. These specified
percentages are called reserve ratios, and the dollar amounts based on them that are
required to be kept on deposit at a Federal Reserve Bank are called required reserves.
Diff: 1
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

5) The market where banks can borrow or lend reserves is called the federal funds
market. The interest rate charged to borrow funds in this market is called the federal
funds rate.
Answer: TRUE
Diff: 1
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

3 Savings and Loan Associations

1) The basic motivation behind creation of S&Ls was the providing of funds for
financing the purchase of a home.
Answer: TRUE
Diff: 1
Topic: 3.3 Savings and Loan Associations
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions

2) To increase the ability of S&Ls to expand the sources of funding available to bolster
their capital, legislation facilitated the conversion of mutually owned companies into a
corporate stock ownership structure.
Answer: TRUE
Diff: 1
Topic: 3.3 Savings and Loan Associations
Objective: 3.7 the capital requirements imposed on commercial banks and savings and
loan associations
3) Although S&Ls had a comparative disadvantage in originating mortgage loans, they
lacked the expertise to make commercial and corporate loans.
Answer: FALSE
Comment: Although S&Ls had a comparative advantage in originating mortgage loans,
they lacked the expertise to make commercial and corporate loans.
Diff: 1
Topic: 3.3 Savings and Loan Associations
Objective: 3.7 the capital requirements imposed on commercial banks and savings and
loan associations

4) After 1981, the bulk of the liabilities of S&Ls consisted of passbook savings accounts
and time deposits.
Answer: FALSE
Comment: Prior to 1981, the bulk of the liabilities of S&Ls consisted of passbook
savings accounts and time deposits.
Diff: 1
Topic: 3.3 Savings and Loan Associations
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions

5) The maximum interest rate that is permitted on deposit accounts has been phased out
by the Depository Institutions Deregulation and Monetary Control Act of 1980
(DIDMCA).
Answer: TRUE
Diff: 1
Topic: 3.3 Savings and Loan Associations
Objective: 3.7 the capital requirements imposed on commercial banks and savings and
loan associations

4 Savings Banks
1) Savings banks are institutions similar to, although much younger than, S&Ls.
Answer: FALSE
Comment: Savings banks are institutions similar to, although much older than, S&Ls.
Diff: 1
Topic: 3.4 Savings Banks
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions

2) The principal source of funds for savings banks is deposits.

Answer: TRUE
Diff: 1
Topic: 3.4 Savings Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts
5 Credit Unions

1) Federal and state-chartered credit unions are referred to as "natural person" credit
unions because they provide financial services to qualifying members of the general
public.
Answer: TRUE
Diff: 1
Topic: 3.5 Credit Unions
Objective: 3.5 who regulates commercial banks and thrifts and the types of regulations
imposed

2) The purpose of credit unions is to serve their members' lending needs.

Answer: FALSE
Comment: The dual purpose of credit unions is to serve their members’ saving and
borrowing needs.
Diff: 1
Topic: 3.5 Credit Unions
Objective: 3.6 the funding sources available to commercial banks and thrifts

Essay Questions

1 Asset/Liability Problem of Depository Institutions

1) Besides facing credit risk and interest rate risk, a depository institution must be
prepared to satisfy withdrawals of funds by depositors and to provide loans to customers.
Identify and explain two ways that a depository institution can accommodate withdrawal
and loan demand.
Answer: A depository institution can accommodate withdrawal and loan demand in four
ways. Below we identify and then comment on these four ways. (1) attract additional
deposits, (2) use existing securities as collateral for borrowing from a federal agency or
other financial institution such as an investment bank, (3) raise short-term funds in the
money market, or (4) sell securities that it owns. The first alternative is self-explanatory.
The second has to do with the privilege where banks are allowed to borrow at the
discount window of the Federal Reserve Banks. The third alternative primarily includes
using marketable securities owned as collateral to raise funds in the repurchase agreement
market, which we cover in later chapters. The fourth alternative, selling securities that it
owns, requires that the depository institution invest a portion of its funds in securities that
are both liquid and have little price risk. By price risk, we refer to the prospect that the
selling price of the security will be less than its purchase price, resulting in a loss.
Diff: 3
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.2 how a depository institution generates income
2 Commercial Banks

1) Explain the following three concepts: discount window, type of collateral (to borrow
from Fed), and discount rate.
Answer: The Federal Reserve Bank is the banker's bank or, to put it another way, the
bank of last resort. Banks temporarily short of funds can borrow from the Fed at its
discount window. Collateral is necessary to borrow, but not just any collateral will do.
The Fed establishes (and periodically changes) the type of collateral that is eligible.
Currently it includes (1) Treasury securities, federal agency securities, and municipal
securities, all with a maturity of less than six months; and (2) commercial and industrial
loans with 90 days or less to maturity. The interest rate that the Fed charges to borrow
funds at the discount window is called the discount rate. The Fed changes this rate
periodically in order to implement monetary policy. Bank borrowing at the Fed to meet
required reserves is quite limited in amount, despite the fact that the discount rate
generally is set below the cost of other sources of short-term funding available to a bank.
This is because the Fed views borrowing at the discount window as a privilege to be used
to meet short-term liquidity needs, and not a device to increase earnings.
Diff: 3
Topic: 3.2 Commercial Banks
Objective: 3.6 the funding sources available to commercial banks and thrifts

2) Discuss how the risk-based capital guidelines attempt to recognize credit risk by
segmenting and weighting requirements.
Answer: First, capital is defined as consisting of Tier 1 and Tier 2 capital. Minimum
requirements are established for each tier. Tier 1 capital is considered core capital; it
consists basically of common stockholders' equity, certain types of preferred stock, and
minority interest in consolidated subsidiaries. Tier 2 capital is called supplementary
capital; it includes loan-loss reserves, certain types of preferred stock, perpetual debt
(debt with no maturity date), hybrid capital instruments and equity contract notes, and
subordinated debt.
Second, the guidelines establish a credit risk weight for all assets. The weight depends on
the credit risk associated with each asset. There are four credit risk classifications for
banks: 0%, 20%, 50%, and 100%, arrived at on no particular scientific basis. The below
table lists examples of assets that fall into each credit risk classification.
Diff: 3
Topic: 3.2 Commercial Banks
Objective: 3.7 the capital requirements imposed on commercial banks and savings and
loan associations
3 Savings and Loan Associations

1) Discuss the S&L crisis focusing your discussion upon the funding problem of lending
long and borrowing short.
Answer: Until the early 1980s, S&Ls and all other lenders financed housing through
traditional mortgages at interest rates fixed for the life of the loan. The period of the loan
was typically long, frequently up to 30 years. Funding for these loans, by regulation,
came from deposits having a maturity considerably shorter than the loans. This is the
funding problem of lending long and borrowing short. It is extremely risky – although
regulators took a long time to understand it. There is no problem, of course, if interest
rates are stable or declining, but if interest rates rise above the interest rate on the
mortgage loan, a negative spread will result, which must result eventually in insolvency.
Regulators at first endeavored to shield the S&L industry from the need to pay high
interest rates without losing deposits by imposing a ceiling on the interest rate that would
be paid by S&Ls and by their immediate competitors, the other depository institutions.
But the approach did not and could not work.
Diff: 3
Topic: 3.3 Savings and Loan Associations
Objective: 3.4 the asset/liability problem all depository institutions face

4 Savings Banks

1) Contrast the differences and similarities between savings banks and S&Ls.
Answer: Savings banks are institutions similar to, although much older than, S&Ls. They
can be either mutually owned (in which case they are called mutual savings banks) or
stockholder owned. While conversion of mutual to corporate structure was made easier
by the Garn-St. Germain Act, most savings banks are of the mutual form. Only 16 states
in the eastern portion of the U.S. charter savings banks. In 1978, Congress permitted the
chartering of federal savings banks. Although the total deposits at savings banks are less
than those at S&Ls, savings banks are typically larger institutions. Asset structures of
savings banks and S&Ls are similar. The principal assets of savings banks are residential
mortgages. Because states have permitted more portfolio diversification than was
permitted by federal regulators of S&Ls, savings bank portfolios weathered funding risk
far better than S&Ls. Included in savings bank portfolios are corporate bonds, Treasury
and government agency securities, municipal securities, common stock, and consumer
loans. The principal source of funds for savings banks is deposits. Typically, the ratio of
deposits to total assets is greater for savings banks than for S&Ls. Savings banks offer the
same types of deposit accounts as S&Ls. Deposits can be insured by either the Bank
Insurance Fund or Savings Association Insurance Fund.
Diff: 3
Topic: 3.4 Savings Banks
Objective: 3.3 differences among commercial banks, savings and loan associations,
savings banks, and credit unions
 5 Credit Unions

1) What is a corporate credit union?

Answer: One might think that a corporate credit union is a credit union set up by
employees of a corporation. It is not. Federal and state-chartered credit unions are
referred to as "natural person" credit unions because they provide financial services to
qualifying members of the general public. In contrast, corporate credit unions provide a
variety of investment services, as well as payment systems, only to natural person credit
unions. Almost all corporate credit unions are federally insured. The U.S. Central Credit
Union acts as the chief liquidity center for corporate credit unions by investing surplus
funds from the other corporate credit unions.
Diff: 2
Topic: 3.5 Credit Unions
Objective: 3.5 who regulates commercial banks and thrifts and the types of regulations
imposed

Quiz Ch. 2

 Question 1

1 out of 1 points

Between 1960 and 2006, the cost of living index, which measures the prices of consumer
goods, increased
Answer
Selected Answer:
More than five times
Correct Answer:
More than five times

 Question 2

1 out of 1 points
 Internal financing is characterized by:
Answer
Selected Answer:
Use of current income and accumulated savings to acquire assets
Correct Answer:
Use of current income and accumulated savings to acquire assets

 Question 3

0 out of 1 points

Financial assets are _____ , meaning they can be easily changed in form and substituted
for other assets. The term that correctly fills in the blank above is:
Answer
Selected Answer:
Liquid
Correct Answer:
Fungible

 Question 4

1 out of 1 points

The inequality statement R >E and DFA > DD, according to your text, describes a:
Answer
Selected Answer:
Surplus-budget unit
Correct Answer:
Surplus-budget unit

 Question 5

1 out of 1 points

The withdrawal of funds from a financial intermediary by ultimate lenders (savers) and
the lending of those funds to ultimate borrowers is called:
Answer
Selected Answer:
Disintermediation
 Correct Answer:
Disintermediation

 Question 6

1 out of 1 points

The text notes that a liquid asset must possess all of the following characteristics except
one. Which item listed below is not necessarily true for a liquid asset?
Answer
Selected Answer:
Divisibility
Correct Answer:
Divisibility

 Question 7

0 out of 1 points

The fact that money always has a constant price in terms of itself (i.e., a dollar always
exchanges for a dollar) refers to money's role as a:
Answer
Selected Answer:
Perfectly liquid asset
Correct Answer:
Standard of value

 Question 8

0 out of 1 points

An increased quantity of real assets leads to:

Answer
Selected Answer:
An increased volume of financial assets
Correct Answer:
An increased quantity of goods and services

 Question 9
 1 out of 1 points

The financial system

Answer
Selected Answer:
All of the above
Correct Answer:
All of the above

 Question 10

0 out of 1 points

Postponing purchases, selling of existing assets, borrowing or issuance of new stock are
alternatives available for a lack of:
Answer
Selected Answer:
None of the above
Correct Answer:
Internal funds

 Question 11

1 out of 1 points

According to the text, insurance companies are classified as:

Answer
Selected Answer:
Contractual institutions
Correct Answer:
Contractual institutions

 Question 12

1 out of 1 points

Portfolio choices made by financial institutions are affected by which of the following
factors?
Answer
Selected Answer:
 All of the above
Correct Answer:
All of the above

 Question 13

1 out of 1 points

For the most part secondary securities issued by financial intermediaries share all of the
following characteristics except one. Identify which one.
Answer
Selected Answer:
Long maturity
Correct Answer:
Long maturity

 Question 14

1 out of 1 points

Direct finance is the technique when borrower and lender meet each other and exchange
funds for financial assets
Answer
Selected Answer:
Without the help of a third-party
Correct Answer:
Without the help of a third-party

 Question 15

0 out of 1 points

The most important financial asset is money. A disadvantage of holding money is:
Answer
Selected Answer:
It has no intrinsic value as a commodity
Correct Answer:
It tends to have a low rate of return
 Question 16

1 out of 1 points

A _____ executes the sell order, while a _____ may buy the securities from the seller.
Answer
Selected Answer:
Broker, dealer
Correct Answer:
Broker, dealer

 Question 17

1 out of 1 points

Inflation
Answer
Selected Answer:
A, B and C
Correct Answer:
A, B and C

 Question 18

1 out of 1 points

The inequality statement E>R and DD >DFA, according to your text, describes a:
Answer
Selected Answer:
Deficit-budget unit
Correct Answer:
Deficit-budget unit

 Question 19

0 out of 1 points

A difference between a financial broker and a financial dealer is that

Answer
 Selected
Answer: A broker must have a college degree in finance
Correct
Answer: A dealer also purchases the seller securities in the hopes of making a
profit on their sale to the buyer

 Question 20

1 out of 1 points

Money's role as a store of value is reduced or made less effective by:

Answer
Selected Answer:
Rising prices for goods and services
Correct Answer:
Rising prices for goods and services

Internet Quiz Ch. 4

1CORRECT
The recent trend toward the removal of government restrictions on the freedom of the
financial markets to trade and allocate resources is called

A)Globalization

B)Harmonization

C)Convergence

D)Consolidation

E)Deregulation

2CORRECT
According to the FDIC Improvement Act passed by the U.S. Congress in 1991, the
federally insured depository institutions must:

A)pass regular full-scope, on-site examinations

B)supply bank regulatory agencies with annual reports, including an annual audit by an
 independent public accountant

C)disclose more of auditor information and of the market values of institutional assets and
capital to the public

D)none of the above

E)all of the above

3CORRECT
Which of the following are the newer financial instruments and services that appear to
have good prospects for rapid market development in the future?

A)Loans to remodel residential dwellings (due to the aging of existing homes and greater
availability of home equity credit)

B)Small business loans

C)Credit swaps and other credit risk derivatives, which permit a lending institution to seek
protection against loan defaults and depreciation in asset values

D)none of the above

E)all of the above

4INCORRECT
In order to promote public confidence, government and the private sector can provide the
following remedies:

A)establishing government insurance systems

B)imposing minimum equity capital requirements on financial-service industries

C)exercising market discipline

D)encouraging the development of larger financial institutions that diversify themselves

geographically and by product line

E)all of the above

5INCORRECT
For the financial-services industry, the technological revolution in information analysis,
storage, and transfer has not

A)enabled more-personalized products and services

B)made the information available more trustworthy

C)led to more efficient pricing and greater shopping convenience

D)increased the need for privacy protection

E)none of the above

6INCORRECT
The recent trend toward deregulation of the worldwide financial sector is likely to
continue. Governments will be under continuing pressure to

A)amend and relax regulations against product-line and geographic diversification

B)lift or liberalize any restrictions placed on the cost of credit (interest rates) and currency
prices

C)either (a) or (b)

D)both (a) and (b)

E)none of the above

7CORRECT Managers of successful financial institutions today must be intimately
familiar with risk-management tools such as:

A)duration analysis

B)interest rate swaps

C)currency swaps

D)financial futures and option contracts

E)all of the above

8CORRECT The more likely future developments in deregulation will be

A)reduced barriers to geographic diversification in order to allow financial institutions to find

new customers anywhere.

B)reduced restrictions on the portfolio choices made by financial institutions except as may be
required to preserve public confidence in financial institutions and the financial system.

C)reorganization of regulatory agencies to avoid duplication and to minimize the burden of

regulation on financial institutions.
 D)reduced barriers to product-line diversification (especially in securities underwriting and
sales and in the underwriting of insurance, merchant banking, and real estate brokerage).

E)All of the above are likely future developments.

9CORRECT Which of the following are prospects for financial markets from
breakthroughs in communications technology?

A)reduced service delivery costs

B)improved employee productivity

C)new financial services being brought on line more rapidly

D)expanded effective marketing areas for both old and new services

E)all of the above

10INCORRECT One problem with government insurance that must be faced is how to avoid
distorting risk-taking decisions by the managers of privately owned financial institutions. This
kind of problem is an incidence of the more general type of the _____ problems encountered in
the economics literature.
A)moral hazard

B)adverse selection

C)risk-averse

D)competitive

E)none of the above

11CORRECT When any financial institution develops serious problems that reach
public notice, the public's confidence in other financial institutions may be damaged as
well. The result can be as follows:

A)a smaller flow of savings through all financial institutions

B)restrictions on the availability of credit

C)fewer jobs

D)slowed economic growth

E)all of the above

 12CORRECT Regulators are likely to be looking closely in the years ahead at which of
the following rules that apply to each financial institution?

A)the adequacy of owners' equity capital, loan-loss reserves, eligibility for low-cost
government insurance

B)permissible risk exposure

C)financial disclosure

D)only (a) and (b)

E)all of the above

13INCORRECT The 1999 Financial Services Modernization (Gramm-Leach-Bliley)

Act

A)allows banks, thrifts, insurance companies, and securities firms to be owned by one
financial holding company

B)adopts the functional regulator model

C)adopts a combination of the single and functional regulator models

D)a and b

E)a and c

14CORRECT Which of the following are the shifting characteristics and needs of
today's financial-service customers?

A)Aging population

B)Larger corporate customers going directly to the open market to raise funds

C)Growing demands for retirement planning and long-term saving by millions of workers and
their families not covered adequately by existing retirement plans

D)Increasing numbers of nontraditional families who have credit-access problems and a need
for lower-cost financial services

E)all of the above

15CORRECT Loss of public confidence not only produces adverse consequences for
individual institutions but also damages the efficiency of financial market processes.
A)True
B)False

16INCORRECT
To cope with the trend of forming more diversified financial firms, we need more
disclosure of information to the public on the true condition of financial institutions, and
we also need more international regulatory cooperation (known as harmonization) to
prevent global contagion and panics by investors and public at large. We need to use
recent technological advances to improve monitoring and warning systems so that
regulators can spot troubled financial firms earlier and have a chance to quickly head off
service problems.

A)True

B)False
17CORRECT One of the most important changes currently sweeping through the
financial system is financial innovation-the development of new financial services and
instruments.

A)True

B)False

18INCORRECT Securitization opens up additional funding sources for financial

institutions, adding liquidity and diversification.

A)True

B)False

19CORRECT Failure to effectively coordinate and control the diverse activities, such
as: service quality, pricing, employee benefits, recruiting, and portfolio selection, may
weaken the diversified financial institution's performance at a time when competition in
financial services is increasing.

A)True

B)False

20CORRECT Governments have taken major steps over the years to ensure the safety
of banks and other financial institutions in order to protect the public's funds.

A)True
B)False