BFW 2401

Week 01 tutorial questions

Name: ----------------------------- --------

Student #:----------------------- ----------
Tutorial time/ day: ----------------------

1. What are the five general areas of FI specialness that are caused by providing various
services to sectors of the economy?

-------- --- --------------------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------- ------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-
2. Identify and explain three economic disincentives that probably would dampen the flow of
funds between household savers of funds and corporate users of funds in an economic
world without FIs

-----------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------------------
3.Explain how FIs act as delegated monitors. What secondary benefits often accrue to the
entire financial system because of this monitoring process?
-----------------------------------------------------------------------------------------------------------------------------------------------
-------- --------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
 -----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-
4. What are agency costs? How do FIs solve the information and related agency costs when
household savers invest directly in securities issued by corporations? What is the free-rider
problem?
----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
5. How do FIs alleviate the problem of liquidity risk faced by investors who wish to invest in
the securities of corporations?

-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------

6. How do FIs help individual savers diversify their portfolio risks? Which type of financial
institution is best able to achieve this goal?

-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
 -----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------

7. What is negative externality? In what ways does the existence of negative externalities justify
the extra regulatory attention received by FIs?
----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------

8. Why are FIs among the most regulated sectors in the world? When is net regulatory
burden positive?
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
 -----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------
9. How do depository institutions such as banks assist in the implementation and transmission
of monetary policy?
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------------------
Industry information
A. Go to APRA's web site and find the latest information on Australian bank, building society and
credit union asset concentration. See(www.apra.gov.au)

B. Go to the website of Bank Negara Malaysia and find details of the list of Financial Institutions in
country. See http://www.bnm.gov.my/index.php?ch=fs&pg=fs_mfs_list&ac=118&lang=en , and
comment briefly on the Financial Institutions settings in Malaysia specifically the share and the
role of conventional banking and insurance vs Islamic banking and Takaful.

Check the following ages in the textbook to answer these tutorial questions:

1) Lange et al ( 2015), pp. 7-13

2) Lange et al ( 2015), pp. 7-18
3) Lange et al ( 2015), p. 9
4) Lange et al ( 2015), p. 9
5) Lange et al ( 2015), pp. 9-10
6) Lange et al ( 2015), pp. 9-10
7) Lange et al ( 2015), p. 14
8) Lange et al ( 2015), pp. 14 -21
9) Lange et al ( 2015), pp. 14 -21
Discussion questions:

The correct answers for the following questions have been provided. Your role is to comment briefly
why the chosen item is the CORRECT ANSWER

1. 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 primary securities and issuing secondary securities.

Comment:

------------------------------------------------------------------------------------------------------ ---------------------------------------
----------------------------------------------------------------------------------------------------------------------------- ----------------
---------------------------------------------------------------------------------------------------------------------------------------------

2. Price risk refers to:

A. the risk that the sale price of an asset will be lower than the purchase price of that asset.
B. the risk that the purchase price of an asset will be lower than the sale price of that asset.
C. the risk that the sale price of an asset will be higher than the purchase price of that asset.
D. None of the listed options are correct.

Comment:

----------------------------------------------------------------------------------------------------------------------------- ----------------
------------------------------------------------------------------------------------------------------------------- --------------------------
----------------------------------------------------------------------------------------------------------------------------- ----------------

3. Economies of scale is the concept that:

A. a cost reduction in trading and other transaction services results from increased efficiency when FIs
perform these services.
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 these services.
D. None of the listed options are correct.

Comment:

------------------------------------------------------------------------------------------------------------ ---------------------------------
----------------------------------------------------------------------------------------------------------------------------- ----------------
---------------------------------------------------------------------------------------------------------------------------------------------

4.. Which of the following statements is true?

A. Primary securities are securities issued by corporations and backed by the real assets of those
corporations.
B. Secondary securities are securities issued by corporations and backed by the real assets of those
corporations.
C. Dominant securities are securities issued by corporations and backed by the real assets of those
corporations.
D. Preliminary securities are securities issued by corporations and backed by the real assets of those
corporations
5. 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.

Comment:

-------------------------------------------------------------------------------------------------------------------- ------------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------

6. Which of the following is an adequate definition of an asset transformer?

A. A corporation that issues financial claims that are more attractive to household savers than the claims
issued by other corporations.
B. An FI that issues financial claims that are more attractive to household savers than the claims issued by
other FIs.
C. A corporation that issues financial claims that are more attractive to household savers than the claims
directly issued by FIs.
D. An FI that issues financial claims that are more attractive to household savers than the claims
directly issued by corporations.

Comment:

-------------------------------------------------------------------------------------------------------------------- -------------------------
--------------------------------------------------------------------------------------------------------- ------------------------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------

7. Which of the following is an adequate definition of a delegated monitor?

A. An economic agent appointed to act on behalf of large groups of agents in collecting information and/or
investing funds.
B. An economic agent appointed to act on behalf of large groups of principals in collecting information
and/or investing funds.
C. An economic agent appointed to act on behalf of smaller agents in collecting information and/or
investing funds.
D. An economic agent appointed to act on behalf of smaller principals in collecting information and/or
investing funds.

Comment:

------------------------------------------------------------------------------------------------------------------------- --------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------

8. 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.

Comment:
---------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------- ----------------
-------------------------------------------------------------------------------------------------------------------- -------------------------

9. Which of the following are reasons for the specialness of financial intermediaries?
A. Higher average information costs.
B. Lower price risk and superior liquidity attributes for financial claims to household savers.
C. Higher average transaction costs.
D. All of the listed options are correct.

-------------------------------------------------------------------------------------------------------------------- -------------------------
---------------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------
------------------------------------------

10. Which of the following statements is true?

A. In a world without financial intermediaries the level of fund flows between household savers and the
corporate sector is likely to be as high as it is with financial intermediaries.
B. In a world without financial intermediaries funds would directly flow from surplus units to deficit units.
C. In a world without financial intermediaries lenders (household) would need to monitor the actions of the
firms to which they have lent their funds.
D. In a world without financial intermediaries funds would directly flow from surplus units to deficit
units and lenders (household) would need to monitor the actions of the firms to which they have
lent their funds.

Comment:

-------------------------------------------------------------------------------------------------------------------- -------------------------
------------------------------------------------------------------------------------------------------------------- --------------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------
-----------------------------------------

11. 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, monitoring costs are part of overall agency costs and the more difficult and costly it
is to collect information, the more likely it is that contracts will be broken.

Comment:

-------------------------------------------------------------------------------------------------------------------- -------------------------
------------------------------------------------------------------------------------------------------------------- --------------------------
-------------------------------------------------------------------------------------------------------------------- -------------------------