Question 1

As an asset transformer, the FI issues financial claims that are more attractive to household savers than the claims directly issued by corporations.

Accepted Answer

This is because financial claims issued by FI offer more security and liquidity than claims issued directly by corporations, making them more appealing to savers.

Question 2

Financial institutions act as intermediaries between suppliers and users of money.

Accepted Answer

Financial institutions such as banks, credit unions, and investment firms help to transfer funds from those who have surplus funds to those who need funds through various financial products and services. This makes them intermediaries between suppliers and users of money.

Question 3

Secondary securities are securities that serve as collateral for primary securities.

Accepted Answer

Secondary securities are those traded in the secondary market, which means they are bought and sold after the original issuance in the primary market, not serving as collateral for primary securities.

Question 4

Currently (2015) J. P. Morgan Chase is the largest bank holding company in the world and operations in 60 countries.

Accepted Answer

As of my last update in 2023, J.P. Morgan Chase is one of the largest bank holding companies, but not the largest in the world. The largest banks are often ranked by different metrics such as total assets, market capitalization, or international presence, and rankings can change over time. Additionally, J.P. Morgan Chase does operate in many countries, but the largest bank by various measures could be considered to be Industrial and Commercial Bank of China (ICBC) or other major global banks depending on the criteria used.

Question 5

FIs are independent market entities that create financial assets whose value is the transformation of financial risk.

Accepted Answer

Financial institutions (FIs) are entities that create financial assets such as loans, bonds, and derivatives. They specialize in managing financial risks and transforming them into products that are sold to investors or other market participants. As such, they play a crucial role in the functioning of financial markets.

Question 6

Financial institutions are subject to economies of scale in the collection of information.

Accepted Answer

Financial institutions can spread the cost of information collection over a larger customer base and benefit from the increased efficiency and accuracy of information gathering and processing. This leads to lower average costs and higher profits as they grow in size.

Question 7

As a delegated monitor, an FI's actions reduce agency costs.

Accepted Answer

As a delegated monitor, an FI is responsible for keeping a watchful eye on the actions of a borrower or agent. This reduces agency costs by minimizing the risk of the borrower or agent acting in their own interest instead of in the interest of the lender or principal. Therefore, the statement is true.

Question 8

FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds.

Accepted Answer

The answer of FIs typically provide secondary claims to household...

Question 9

Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower.

Accepted Answer

Bank loans often have covenants and terms that allow banks significant monitoring power and control over the borrower, more so than many longer-term debt contracts which might be more standardized and less closely monitored.

Question 10

If a household invests in corporate securities and does not supervise how the funds are invested or used by the corporation, the risk of not earning the desired return or not having the funds returned increase.

Accepted Answer

If the household does not supervise how the funds are invested or used by the corporation, they have less control over the potential risks and may not receive the desired return or have the funds returned.

Question 11

If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness and increase the risk of investing in corporate debt and equity by individuals.

Accepted Answer

If financial institutions (FIs) do not monitor the actions of borrowers, it would increase the risk for individual investors in corporate debt and equity. Without proper monitoring, borrowers may default on their obligations or engage in fraudulent activities, increasing the likelihood of losses for investors. Therefore, monitoring by FIs is important for maintaining the attractiveness and reducing the risk of investing in corporate debt and equity.

Question 12

The more costly it is to supervise the use of funds by a borrower, the less likely a saver will encounter agency costs.

Accepted Answer

The more costly it is to supervise the use of funds by a borrower, the more likely a saver will encounter agency costs. This is because the borrower may have more opportunities to misuse the funds or take actions that do not align with the interests of the saver. Therefore, the saver may need to invest more resources to monitor the borrower's behavior, which increases the likelihood of agency costs.

Question 13

The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk.

Accepted Answer

The risk that the sale price of an asset will be less than the purchase price of an asset is called price risk or market risk. Liquidity risk refers to the risk of not being able to sell or exit an investment at the desired time or at a fair price.

Question 14

An FI is exposed to liquidity risk because the average maturity of assets and the average maturity of liabilities are often different on the FIs balance sheet.

Accepted Answer

The answer of An FI is exposed to liquidity risk...

Question 15

As of 2015, U.S. FIs held assets totaling over $29 trillion.

Accepted Answer

This statement is true. According to the Federal Reserve's Flow of Funds Report, as of Q4 2015, total assets held by U.S. Financial Institutions (including commercial banks, savings institutions, and credit unions) amounted to over $29 trillion.

Question 16

Compared to households, FIs often have economies of scale when purchasing or selling securities issued by businesses and governments.

Accepted Answer

FIs often deal with large amounts of securities, allowing them to negotiate better prices and lower transaction fees. Therefore, they have economies of scale when purchasing or selling securities.

Question 17

The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing secondary claims issued by households and other investors.

Accepted Answer

The asset transformation function of an FI (Financial Institution) typically involves issuing primary claims to households and other investors (such as deposits or insurance policies) while purchasing secondary claims issued by corporations and governments (such as loans, bonds, or equities).

Question 18

Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in that firm exposes the investor to agency costs.

Accepted Answer

Failure to monitor a firm's actions after purchasing securities can result in agency costs, such as the misalignment of interests between the company's management and the shareholders. Timely and complete monitoring can help mitigate these costs.

Question 19

When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.

Accepted Answer

When an FI functions as a broker, they are facilitating the purchase or sale of financial assets between two parties and do not create or hold the financial asset on their balance sheet.

Question 20

An FI acting as an agent in matching savers and borrowers of funds can attain economies of scale and provide this service more efficiently than either the saver or borrower could on their own.

Accepted Answer

Financial intermediaries (FIs) can attain economies of scale by pooling funds from savers and making them available to borrowers, thus reducing transaction costs and risks associated with direct borrowing/lending. This can result in more efficient allocation of funds and better returns for savers and borrowers.

Quiz 1: Why Are Financial Institutions Special