BM_Week 1

A loan covenant is:

• A. a legal clause in a borrowing contract that requires the lender to avoid certain actions.

• B. a legal clause in a borrowing contract that requires the lender to take certain actions.

• C. a legal clause in a borrowing contract that requires the borrower to take certain actions.

• D. a legal clause in a borrowing contract that requires the borrower to either take certain actions or avoid certain actions.

FIs perform their intermediary function in two ways:

• A. They specialise as brokers between savers and users.

• B. They serve as asset transformers by purchasing primary securities and issuing secondary securities.

• C. They serve as asset transformers by purchasing secondary securities and issuing primary securities.

• D. They specialise as brokers between savers and users and they serve as asset transformers by purchasing primarysecurities and issuing secondary securities.

Economies of scale is the concept that:

• A. a cost reduction in trading and other transaction services results from increased efficiency when FIs perform theseservices.

• B. a profitability increase in trading and other transaction services results from increased efficiency when FIs perform these services.

• C. a cost reduction in trading and other transaction services results from stable efficiency when FIs perform theseservices.

• D. None of the listed options are correct.

Secondary securities are securities issued by FIs and backed by:

• A. the real assets of the FI.

• B. primary securities.

• C. guarantees.

• D. any type of collateral.

The ability of an economic agent to reduce risk by holding a number of securities in a portfolio is called:

• A. asset management.

• B. efficiency.

• C. arbitrage.

• D. diversification.

The part of the money supply produced by the private banking system is called:

• A. inside money.

• B. outside money.

• C. indirect money.

• D. The private banking system does not produce part of the money supply.

The following are protective mechanisms that have been developed by regulators to promote the safety and soundness of the banking system except:

• A. encouraging banks to rely more on deposits rather than debt or capital as a cushion against failure.

• B. encouraging banks to limit lending to a single customer to no more than 10 per cent of capital.

• C. the provision of deposit insurance.

• D. the periodic monitoring of banks.

Which of the following statements is true?

• A. Agency costs arise whenever economic agents enter into a contract in a world of incomplete information.

• B. Monitoring costs are part of overall agency costs.

• C. The more difficult and costly it is to collect information, the more likely it is that contracts will be broken.

• D. Agency costs arise whenever economic agents enter into a contract in a world of incomplete information, monitoringcosts are part of overall agency costs and the more difficult and costly it is to collect information, the more likely it is thatcontracts will be broken.

Which of the following statements is true in the context of diversification?

• A. As long as the return on different investments is not perfectly positively correlated, financial intermediaries can diversifyaway significant amounts of portfolio risk.

• B. As long as the return on different investments is not perfectly negatively correlated, financial intermediaries candiversify away significant amounts of portfolio risk.

• C. As long as the return on different investments is perfectly positively correlated, financial intermediaries can diversifyaway significant amounts of portfolio risk.

• D. None of the listed options are correct.

Why do households prefer to use FIs as intermediaries to invest their surplus funds?

• A. Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investmentinformation.

• B. To receive the benefits of diversification that households may not be able to achieve on their own.

• C. The FI can benefit from combining funds and negotiating lower asset prices and transaction costs.

• D. All of the listed options are correct.