05/03/2021

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Week2 Fin Institutions

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1. A _____________ is when one party in a financial contract has incentives to act in its own
interest rather than in the interests of the other party.

(1 mark)
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moral hazard

risk

conflict of interest

financial panic

Response Rationale
Please provide a rationale for your answer.

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No rationale provided.

2. The presence of __________________ in financial markets leads to adverse selection and

moral hazard problems that interfere with the efficient functioning of financial markets.

(1 mark)
You scored 1 / 1 mark

noncollateralized risk

free-riding

asymmetric information

excess risk taking

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

3. Sometimes insurance companies give a No-Claim Discount (NCD) on one's car insurance
premium if the person has been driving safely for consecutive years. NCD is a useful
mechanism for the insurance company to deal with the problem of _________________.

(1 mark)
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reduced market share

adverse selection

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moral hazard

conflict of interest

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

4. Which of the following financial intermediaries are depository institutions?

(1 mark)
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A savings and loan association

A commercial bank

A credit union

All of the above

Only A and C of the above

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

5. If universal banking is permitted in one country, commercial banks in that country can also
conduct investment banking business. A financial institution that has both lines of business is
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known as a universal bank. In the United States, the Glass–Steagall Act (1933) separated
commercial banking from investment banking and effectively prohibited universal banking.
From the point of view of the major business functions of commercial banks and investment
banks, which of the following is the most plausible explanation for this banning of universal
banking?

(1 mark)
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The investment banking arm of a universal bank securitizes the assets of the commercial
banking arm and induces subprime mortgage loans, causing the Global Financial Crisis.

The commercial banking arm of a universal bank acquires proprietary information of

firms from its lending business and shares this information illegally with the investment
banking arm and therefore helps the sales & trading team deceive the investors.

There can be a conflict of interests between the corporate finance and sales & trading
businesses in investment banking, prompting the establishment of the "Chinese wall".

The commercial banking arm of a universal bank can sell unit trusts and other
investment products and it brings more competition tothe sales &trading team in the
investment banking arm.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

6. The closed-end discount puzzle refers to the puzzling phenomenon that closed-end mutual
funds are issued at discount from their net asset value (NAV).

(1 mark)
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True

False

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Response Rationale
Please provide a rationale for your answer.

No rationale provided.

7. Securitization is the process of transforming illiquid financial assets such as residential

mortgages into marketable securities.

(1 mark)
You scored 1 / 1 mark

True

False

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

7/7 QUESTIONS ANSWERED CORRECTLY

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