FINA 465 EXAM 1 QUESTIONS AND
ANSWERS 100% PASS 2026/2027
Information costs - ANS The aggregation of funds in a FI provides greater incentive to collect
information about customers (such as corporations) And tp monitor their actions. The relatively
large size of the FI allows this collection fo information to be accomplished at a lower average
cost (so called economics of scale) than would be the case for individuals.
Liquidity and Price Risk - ANS FIs provide financial claims to household savers with superior
liquidity attributes and with lower price risk
Transaction cost services - ANS Similar to economies of scale in information production costs,
an FI's size can result in economies of scale in transaction costs.
maturity intermediation - ANS FIs can better bear the risk of mismatching the maturities of
their assets and liabilities
Transmission of monetary supply - ANS Depository institutions are the conduit through which
monetary policy actions by the country's central bank (the Federal Reserve) impact the rest of
the financial system and the economy.
Credit allocation - ANS FIs are often viewed as the major, and sometimes only, source of
financing for a particular sector of the economy, such as farming and residential real estate
@2026 ALLRIGHTS RESERVED 1
,Intergenerational wealth transfers - ANS FIs, especially life insurance companies and pension
funds, provide savers with the ability to transfer wealth from one generation to the next
Payment services - ANS the efficiency with which depository institutions provide payment
services directly benefits the economy
Denomination Intermediation - ANS FIs such as mutual funds allow small investors to
overcome constraints to buying assets imposed by large minimum denomination size
liquidity - ANS The ease of converting an asset into cash
price risk - ANS the risk that an asset's sale price will be lower than its purchase price
economics of scale - ANS The concept that the cost reduction in trading and other
transactions services results in increased efficiency when FIs perform these services
asset transformation - ANS An FI issues financial claims that are more attractive to household
savers than the claims directly issued by corporations
primary securities - ANS securities issued by corporations and backed by the real assets of
those corporations
secondary securities - ANS securities issued by FIs and backed by primary securities
agency costs - ANS costs relating to the risk that the owners and managers of firms that
receive savers' funds will take actions with those funds contrary to the best interests of the
savers
@2026 ALLRIGHTS RESERVED 2
, delegated monitor - ANS an economic agent appointed to act on behalf of smaller investors
in collecting information and/or investing funds on their behalf
diversify - ANS reducing risk by holding a number of different securities in portfolio
What are the three major risks to household savers from direct security purchases? -
ANS Information costs -households must monitor the actions of firms in a timely and
complete fashion after purchasing securities. Failure to monitor leads to agency costs.
Liquidity and Price Risk - FIs are able to diversify risk, can offer high liquidity and low price risk
Reduced Transaction Costs/Maturity Intermediation - potential for economies scale in
transaction costs (lower commission charges), bear risk of mismatching maturities of assets and
liabilities.
What are two major differences between brokers (such as security brokers) and depository
institutions? - ANS full service securities firms carry out research and investment
recommendations for clients while conducting purchases and sales. DI's carry out purchase and
sale only.
What is the link between asset diversification and the liquidity of deposit contracts? -
ANS With diversification of 15 or more securities it can supply high liquid claims with little
price or capital value risk.
net regulatory burden - ANS the difference between the private costs of regulations and the
private benefits for the producers of financial services
outside money - ANS the part of the money supply directly produced by the government or
central bank, such as notes and coin
@2026 ALLRIGHTS RESERVED 3
ANSWERS 100% PASS 2026/2027
Information costs - ANS The aggregation of funds in a FI provides greater incentive to collect
information about customers (such as corporations) And tp monitor their actions. The relatively
large size of the FI allows this collection fo information to be accomplished at a lower average
cost (so called economics of scale) than would be the case for individuals.
Liquidity and Price Risk - ANS FIs provide financial claims to household savers with superior
liquidity attributes and with lower price risk
Transaction cost services - ANS Similar to economies of scale in information production costs,
an FI's size can result in economies of scale in transaction costs.
maturity intermediation - ANS FIs can better bear the risk of mismatching the maturities of
their assets and liabilities
Transmission of monetary supply - ANS Depository institutions are the conduit through which
monetary policy actions by the country's central bank (the Federal Reserve) impact the rest of
the financial system and the economy.
Credit allocation - ANS FIs are often viewed as the major, and sometimes only, source of
financing for a particular sector of the economy, such as farming and residential real estate
@2026 ALLRIGHTS RESERVED 1
,Intergenerational wealth transfers - ANS FIs, especially life insurance companies and pension
funds, provide savers with the ability to transfer wealth from one generation to the next
Payment services - ANS the efficiency with which depository institutions provide payment
services directly benefits the economy
Denomination Intermediation - ANS FIs such as mutual funds allow small investors to
overcome constraints to buying assets imposed by large minimum denomination size
liquidity - ANS The ease of converting an asset into cash
price risk - ANS the risk that an asset's sale price will be lower than its purchase price
economics of scale - ANS The concept that the cost reduction in trading and other
transactions services results in increased efficiency when FIs perform these services
asset transformation - ANS An FI issues financial claims that are more attractive to household
savers than the claims directly issued by corporations
primary securities - ANS securities issued by corporations and backed by the real assets of
those corporations
secondary securities - ANS securities issued by FIs and backed by primary securities
agency costs - ANS costs relating to the risk that the owners and managers of firms that
receive savers' funds will take actions with those funds contrary to the best interests of the
savers
@2026 ALLRIGHTS RESERVED 2
, delegated monitor - ANS an economic agent appointed to act on behalf of smaller investors
in collecting information and/or investing funds on their behalf
diversify - ANS reducing risk by holding a number of different securities in portfolio
What are the three major risks to household savers from direct security purchases? -
ANS Information costs -households must monitor the actions of firms in a timely and
complete fashion after purchasing securities. Failure to monitor leads to agency costs.
Liquidity and Price Risk - FIs are able to diversify risk, can offer high liquidity and low price risk
Reduced Transaction Costs/Maturity Intermediation - potential for economies scale in
transaction costs (lower commission charges), bear risk of mismatching maturities of assets and
liabilities.
What are two major differences between brokers (such as security brokers) and depository
institutions? - ANS full service securities firms carry out research and investment
recommendations for clients while conducting purchases and sales. DI's carry out purchase and
sale only.
What is the link between asset diversification and the liquidity of deposit contracts? -
ANS With diversification of 15 or more securities it can supply high liquid claims with little
price or capital value risk.
net regulatory burden - ANS the difference between the private costs of regulations and the
private benefits for the producers of financial services
outside money - ANS the part of the money supply directly produced by the government or
central bank, such as notes and coin
@2026 ALLRIGHTS RESERVED 3
