FIN 321 Test Exam Questions And
Answers Latest Update
Does it make sense that the typical household is a surplus spending
unit (SSU) while the typical business firm is a deficit spending unit
(DSU)? Explain. - - correct answer ✅Yes, households are mainly in
surplus because they're typically always saving in the form of
retirement. Businesses are typically in deficit because they must
borrow money to fund an idea or operation, and they usually invest
more in real assets than they receive in current operating cash flow.
Why are direct financing transactions more costly or inconvenient
than intermediated transactions? - - correct answer ✅The parties
to direct finance have to find each other and negotiate a more or
less exact match of preferences as to amount, maturity, and risk.
Intermediaries provide all parties choices about financial activity,
and drive costs down through competition, diversification, and
economies of scale.
Explain how you believe economic activity would be affected if we
did not have financial markets and institutions. - - correct answer
✅Financial markets and institutions make transactions more cost
and time efficient since they specialize in transactions. Since it's
more efficient, this increases economic activity so... a lack of
financial markets and institutions would result in a decrease in
economic activity.
,FIN 321 Test Exam Questions And
Answers Latest Update
Explain the concept of financial intermediation. How does the
possibility of financial intermediation increase the efficiency of the
financial system? - - correct answer ✅Financial intermediation is
the process by which financial institutions mediate unmatched
preferences of ultimate borrowers (DSUs) and ultimate lenders
(SSUs). Financial intermediaries buy financial claims with one set of
characteristics from DSUs, then issue their own liabilities with
different characteristics to SSUs. Thus, financial intermediaries
"transform" claims to make them more attractive to both DSUs and
SSUs. This increases the amount and regularity of participation in
the financial system, thus making financial markets more efficient.
Explain the differences between the money markets and the capital
markets. Which market would General Motors use to finance a new
vehicle assembly plant? Why? - - correct answer ✅Money markets
are markets for liquidity, whether borrowed to finance current
operations or lent to avoid holding idle cash in the short term.
Money markets tend to be wholesale OTC markets made by
dealers. Capital markets are where real assets or "capital goods"
are permanently financed, and involve a variety of wholesale and
retail arrangements, both on organized exchanges and in OTC
markets.
GM would finance its new plant by issuing bonds or stock in the
capital market. Investors would purchase those securities to build
wealth over the long term, not to store liquidity. GMAC, the finance
company subsidiary of GM, would finance its loan receivables both
, FIN 321 Test Exam Questions And
Answers Latest Update
in the money market (commercial paper) and in the capital market
(notes and bonds). GM would use the money market to "store"
cash in money market securities, which are generally, safe, liquid,
and short-term.
What steps should bank management take to manage credit risk in
the bank's loan portfolio? - - correct answer ✅Banks manage
credit risk of their loan portfolios by (1) diversifying the portfolios
across regions, industries, and types of loans, (2) conducting a
careful credit analysis of potential borrowers, and (3) continually
monitoring the borrowers over the life of the loan or investment.
Banks develop and follow lending policies which set guidelines for
lending officers.
Why do corporations issue commercial paper? - - correct answer
✅Commercial paper is short-term corporate debt; it is issued to
meet corporate short-term cash obligations.
Explain the adverse selection problem. How can lenders reduce its
effect? - - correct answer ✅Adverse selection arises from
asymmetric information and, in the context of debt markets, refers
to borrowers of poor credit quality applying for loans (perhaps
because such borrowers need the loans the most in order to
survive financially). The lender may reduce adverse selection by
requiring loan applicants to supply detailed financial statements
Answers Latest Update
Does it make sense that the typical household is a surplus spending
unit (SSU) while the typical business firm is a deficit spending unit
(DSU)? Explain. - - correct answer ✅Yes, households are mainly in
surplus because they're typically always saving in the form of
retirement. Businesses are typically in deficit because they must
borrow money to fund an idea or operation, and they usually invest
more in real assets than they receive in current operating cash flow.
Why are direct financing transactions more costly or inconvenient
than intermediated transactions? - - correct answer ✅The parties
to direct finance have to find each other and negotiate a more or
less exact match of preferences as to amount, maturity, and risk.
Intermediaries provide all parties choices about financial activity,
and drive costs down through competition, diversification, and
economies of scale.
Explain how you believe economic activity would be affected if we
did not have financial markets and institutions. - - correct answer
✅Financial markets and institutions make transactions more cost
and time efficient since they specialize in transactions. Since it's
more efficient, this increases economic activity so... a lack of
financial markets and institutions would result in a decrease in
economic activity.
,FIN 321 Test Exam Questions And
Answers Latest Update
Explain the concept of financial intermediation. How does the
possibility of financial intermediation increase the efficiency of the
financial system? - - correct answer ✅Financial intermediation is
the process by which financial institutions mediate unmatched
preferences of ultimate borrowers (DSUs) and ultimate lenders
(SSUs). Financial intermediaries buy financial claims with one set of
characteristics from DSUs, then issue their own liabilities with
different characteristics to SSUs. Thus, financial intermediaries
"transform" claims to make them more attractive to both DSUs and
SSUs. This increases the amount and regularity of participation in
the financial system, thus making financial markets more efficient.
Explain the differences between the money markets and the capital
markets. Which market would General Motors use to finance a new
vehicle assembly plant? Why? - - correct answer ✅Money markets
are markets for liquidity, whether borrowed to finance current
operations or lent to avoid holding idle cash in the short term.
Money markets tend to be wholesale OTC markets made by
dealers. Capital markets are where real assets or "capital goods"
are permanently financed, and involve a variety of wholesale and
retail arrangements, both on organized exchanges and in OTC
markets.
GM would finance its new plant by issuing bonds or stock in the
capital market. Investors would purchase those securities to build
wealth over the long term, not to store liquidity. GMAC, the finance
company subsidiary of GM, would finance its loan receivables both
, FIN 321 Test Exam Questions And
Answers Latest Update
in the money market (commercial paper) and in the capital market
(notes and bonds). GM would use the money market to "store"
cash in money market securities, which are generally, safe, liquid,
and short-term.
What steps should bank management take to manage credit risk in
the bank's loan portfolio? - - correct answer ✅Banks manage
credit risk of their loan portfolios by (1) diversifying the portfolios
across regions, industries, and types of loans, (2) conducting a
careful credit analysis of potential borrowers, and (3) continually
monitoring the borrowers over the life of the loan or investment.
Banks develop and follow lending policies which set guidelines for
lending officers.
Why do corporations issue commercial paper? - - correct answer
✅Commercial paper is short-term corporate debt; it is issued to
meet corporate short-term cash obligations.
Explain the adverse selection problem. How can lenders reduce its
effect? - - correct answer ✅Adverse selection arises from
asymmetric information and, in the context of debt markets, refers
to borrowers of poor credit quality applying for loans (perhaps
because such borrowers need the loans the most in order to
survive financially). The lender may reduce adverse selection by
requiring loan applicants to supply detailed financial statements
