Question 1

The primary assets of credit unions are
A)municipal bonds.
B)business loans.
C)consumer loans.
D)mortgages.

Accepted Answer

The answer of The primary assets of credit unions are
A)municipal...

Question 2

Which of the following financial intermediaries is not a depository institution?
A)A savings and loan association
B)A commercial bank
C)A credit union
D)A finance company

Accepted Answer

Depository institutions accept deposits from customers and use those funds to make loans. Savings and loan associations, commercial banks, and credit unions are all examples of depository institutions. However, finance companies are non-depository institutions, which means they do not accept deposits but instead provide loans using funds from other sources such as investors or banks.

Question 3

________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.
A)Investment
B)Contractual savings
C)Thrift
D)Depository

Accepted Answer

Contractual savings institutions acquire funds on a contractual basis, meaning individuals commit to regularly depositing a fixed amount of money. This includes life insurance companies and pension funds. Investment institutions invest funds on behalf of their clients, while thrift institutions focus on accepting deposits and making loans. Depository institutions, like banks and credit unions, accept deposits and provide loans to their customers.

Question 4

Adverse selection is a problem associated with equity and debt contracts arising from
A)the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.
B)the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.
C)the borrower's lack of incentive to seek a loan for highly risky investments.
D)the borrower's lack of good options for obtaining funds.

Accepted Answer

Adverse selection occurs when one party has better information than the other party, which leads to a situation where the less informed party is likely to make decisions that lead to negative outcomes. In the case of equity and debt contracts, adverse selection arises from the lender's relative lack of information about the borrower's potential returns and risks of their investment activities. This can lead to situations where the borrower presents a higher risk than the lender initially anticipated, which can result in the lender bearing more risk than they intended to take on.

Question 5

The primary liabilities of depository institutions are
A)premiums from policies.
B)shares.
C)deposits.
D)bonds.

Accepted Answer

Depository institutions primarily hold deposits from their customers, which include individuals, businesses, and other financial institutions. These deposits are the primary source of funding for depository institutions to make loans and investments.

Question 6

Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from
A)government agencies.
B)equities markets.
C)financial intermediaries.
D)bond markets.

Accepted Answer

Studies have shown that businesses in major developed countries usually obtain funds from financial intermediaries such as banks, credit unions, and other financial institutions. These intermediaries provide access to loans, lines of credit, and other forms of financing that businesses need to carry out their activities. While bond markets and equities markets can also be sources of funding, they are typically used to raise capital for specific projects or expansion plans rather than ongoing business operations. Government agencies may provide funding in certain cases, such as for research and development or environmental projects, but this is not a common source of financing for most businesses.

Question 7

Which of the following is a contractual savings institution?
A)A life insurance company
B)A credit union
C)A savings and loan association
D)A mutual fund

Accepted Answer

A life insurance company is a contractual savings institution because policyholders pay premiums in return for guarantees of certain benefits upon the occurrence of specified events such as death, disability, or reaching a certain age. The premiums paid by policyholders are invested by the insurance company, creating a pool of funds from which the company can pay out claims and other policy benefits.

Question 8

The countries that have made the least use of securities markets are ________ and ________; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets.
A)Germany; Japan
B)Germany; Great Britain
C)Great Britain; Canada
D)Canada; Japan

Accepted Answer

Germany and Japan have historically relied more on bank financing than on securities markets, with finance from financial intermediaries being significantly greater than that from securities markets.

Question 9

Although the dominance of ________ over ________ is clear in all countries,the relative importance of bond versus stock markets differs widely.
A)financial intermediaries; securities markets
B)financial intermediaries; government agencies
C)government agencies; financial intermediaries
D)government agencies; securities markets

Accepted Answer

The correct answer is A) financial intermediaries; securities markets. This is because the statement refers to the dominance of one type of financial market entity over another. Financial intermediaries, such as banks and investment companies, often have a more dominant role in the financial system compared to securities markets, which include stock and bond markets. However, the relative importance of bond versus stock markets can vary by country.

Question 10

Because there is an imbalance of information in a lending situation,we must deal with the problems of adverse selection and moral hazard.Define these terms and explain how financial intermediaries can reduce these problems.

Accepted Answer

The answer of Because there is an imbalance of information...

Question 11

Typically,borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project.The difference in information is called
A)moral selection.
B)risk sharing.
C)asymmetric information.
D)adverse hazard

Accepted Answer

Asymmetric information refers to the situation where one party in a transaction has superior information compared to the other party. In the context of borrowing and lending, it means that borrowers have more information about the potential returns and risks of an investment project than lenders.

Question 12

Financial institutions that accept deposits and make loans are called ________ institutions.
A)investment
B)contractual savings
C)depository
D)underwriting

Accepted Answer

Depository institutions are financial institutions that accept deposits and make loans. Investment institutions deal in securities, contractual savings institutions collect premiums or contributions and invest them, and underwriting institutions help companies issue new securities. None of these options fit the description of accepting deposits and making loans.

Question 13

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.
A)adverse selection
B)moral hazard
C)risk sharing
D)credit risk

Accepted Answer

The situation described is an example of moral hazard, where one party (the corporation) takes on more risk because they know they will not bear the full consequences of their actions, while the other party (the bondholders) bears the majority of the risk. This is because the corporation is using the bond funds for a purpose other than what it was intended for, which could potentially lead to financial distress and default on the bonds.

Question 14

Risk sharing is profitable for financial institutions due to
A)low transactions costs.
B)asymmetric information.
C)adverse selection.
D)moral hazard.

Accepted Answer

Risk sharing allows financial institutions to diversify and spread the risk of their investments. This reduces the potential losses from any one particular investment. Additionally, risk sharing agreements often involve low transactions costs compared to other investment instruments (such as options or futures). This combination of reduced risk and lower transaction costs can lead to increased profitability for financial institutions. Asymmetric information, adverse selection, and moral hazard are all potential challenges or risks associated with risk sharing arrangements, but they do not necessarily make risk sharing less profitable for financial institutions.

Question 15

The problem created by asymmetric information before the transaction occurs is called ________,while the problem created after the transaction occurs is called ________.
A)adverse selection; moral hazard
B)moral hazard; adverse selection
C)costly state verification; free-riding
D)free-riding; costly state verification

Accepted Answer

Adverse selection is the problem created before the transaction occurs, where one party has more information than the other and uses it to their advantage. Moral hazard, on the other hand, is a problem created after the transaction occurs, where one party takes more risks because they know the other party will bear the consequences. Costly state verification and free-riding are not directly related to the problem of asymmetric information.

Question 16

Which of the following is a depository institution?
A)A life insurance company
B)A credit union
C)A pension fund
D)A mutual fund

Accepted Answer

A depository institution is an institution that accepts deposits from customers and holds those funds in accounts such as savings accounts, checking accounts, and certificates of deposit. Credit unions are depository institutions because they accept deposits and also offer loans and other financial services to their members. Life insurance companies, pension funds, and mutual funds are not depository institutions as they do not accept deposits.

Question 17

Thrift institutions include
A)banks,mutual funds,and insurance companies.
B)savings and loan associations,mutual savings banks,and credit unions.
C)finance companies,mutual funds,and money market funds.
D)pension funds,mutual funds,and banks.

Accepted Answer

Thrift institutions are primarily institutions that accept deposits and provide loans, but are not commercial banks. Examples of thrift institutions include savings and loan associations, mutual savings banks, and credit unions. Therefore, choice B is the best answer as it includes only thrift institutions. Option A includes commercial banks, insurance companies, and mutual funds, while option C includes finance companies and money market funds which are not thrift institutions. Option D includes banks, but it also includes pension funds and mutual funds which are not thrift institutions.

Question 18

The primary liabilities of a commercial bank are
A)bonds.
B)mortgages.
C)deposits.
D)commercial paper.

Accepted Answer

The primary liabilities of a commercial bank are deposits, which consist of funds held in checking, savings, and other types of accounts by customers. Bonds and commercial paper are types of debt that a bank can issue to raise funds, while mortgages are assets that a bank holds (since they represent loans made to customers). However, none of these items are considered primary liabilities for a commercial bank.

Question 19

Which of the following is a depository institution?
A)A life insurance company
B)A mutual savings bank
C)A pension fund
D)A finance company

Accepted Answer

A depository institution is an organization that primarily accepts deposits from individuals, households, and other institutions, and uses these funds to make loans or invest in financial assets such as securities. Mutual savings banks are one type of depository institution that typically focus on serving local communities and providing banking services to individual customers. Life insurance companies, pension funds, and finance companies are not depository institutions, as their primary functions involve providing insurance coverage, managing retirement savings, or extending credit to customers, respectively.

Question 20

If bad credit risks are the ones who most actively seek loans and,therefore,receive them from financial intermediaries,then financial intermediaries face the problem of
A)moral hazard.
B)adverse selection.
C)free-riding.
D)costly state verification.

Accepted Answer

Adverse selection refers to a situation where one party has more information than the other party in a transaction, resulting in the less-informed party selecting against their best interest. In this case, financial intermediaries may end up lending more to bad credit risks who actively seek loans, resulting in a higher likelihood of loan default and greater risk for the intermediary.

Quiz 2: An Overview of the Financial System

The primary assets of credit unions are

Which of the following financial intermediaries is not a depository institution?

________ institutions are financial intermediaries that acquire funds at periodic intervals on a contractual basis.

Adverse selection is a problem associated with equity and debt contracts arising from

The primary liabilities of depository institutions are

Studies of the major developed countries show that when businesses go looking for funds to finance their activities they usually obtain these funds from

Which of the following is a contractual savings institution?

The countries that have made the least use of securities markets are and ; in these two countries finance from financial intermediaries has been almost ten times greater than that from securities markets.

Although the dominance of over is clear in all countries,the relative importance of bond versus stock markets differs widely.

Because there is an imbalance of information in a lending situation,we must deal with the problems of adverse selection and moral hazard.Define these terms and explain how financial intermediaries can reduce these problems.

Typically,borrowers have superior information relative to lenders about the potential returns and risks associated with an investment project.The difference in information is called

Financial institutions that accept deposits and make loans are called ________ institutions.

An example of the problem of ________ is when a corporation uses the funds raised from selling bonds to fund corporate expansion to pay for Caribbean cruises for all of its employees and their families.

Risk sharing is profitable for financial institutions due to

The problem created by asymmetric information before the transaction occurs is called ,while the problem created after the transaction occurs is called .

Which of the following is a depository institution?

Thrift institutions include

The primary liabilities of a commercial bank are

Which of the following is a depository institution?

If bad credit risks are the ones who most actively seek loans and,therefore,receive them from financial intermediaries,then financial intermediaries face the problem of