Financial Institutions Essay

4186 WordsOct 31, 201117 Pages
Chapter 01 - Why Are Financial Institutions Special? Chapter One Why Are Financial Institutions Special? True/False 1-1 Prior to the financial crisis of 2007-2008, J.P. Morgan Chase was the largest bank holding company in the world and operations in 60 countries. Answer: F 1-2 As of 2009, U.S. FIs held assets totaling over $35 trillion Answer: T 1-3 Financial institutions act as intermediaries between suppliers and demanders of money. Answer: T 1-4 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. Answer: T 1-5 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. Answer: T 1-6 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. Answer: T 1-7 The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk. Answer: F 1-8 Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less monitoring power and control over the borrower. Answer: F 1-9 FIs typically provide secondary claims to household savers that have inferior liquidity than primary securities of corporations such as equity and bonds. Answer: F 1-10 Because the average maturity of assets and the average maturity of liabilities are often different on an FIs balance sheet, the FI is exposed to liquidity risk. Answer: F 1-11 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. 1-1 Chapter 01 - Why Are Financial Institutions Special? Answer: F 1-12
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