Chapter 01
Why Are Financial Institutions Special?
True / False Questions
1. Currently (2012) J.P. Morgan Chase is the largest bank holding company in the world and
operations in 60 countries.
True False
2. As of 2012, U.S. FIs held assets totaling over $27 trillion
True False
3. Financial institutions act as intermediaries between suppliers and demanders of money.
True False
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.
True False
1-1
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McGraw-Hill Education.
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.
True False
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.
True False
7. The risk that the sale price of an asset will be less than the purchase price of an asset is called
liquidity risk.
True False
8. Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less
monitoring power and control over the borrower.
True False
9. FIs typically provide secondary claims to household savers that have inferior liquidity than primary
securities of corporations such as equity and bonds.
True False
10. 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.
True False
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Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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.
True False
12. 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.
True False
13. Financial institutions are subject to economies of scale in the collection of information.
True False
14. As an asset transformer, the FI issues financial claims that are more attractive to household
savers than the claims directly issued by corporations.
True False
15. The asset transformation function of an FI is to issue primary financial claims to corporations
while purchasing primary claims issued by households and other investors.
True False
16. Secondary securities are securities that serve as collateral for primary securities.
True False
1-3
Copyright ? 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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