VI. Categories of Financial Intermediaries

Question 1

What categories are there in the principal financial intermediaries?

Answer 1

• Depository institutions (banks)
• Contractual savings institutions, and
• Investment intermediaries.

Question 2

_________ are financial intermediaries that accept deposits from individuals and
institutions and make loans.

Answer 2

Depository institutions (banks)

Question 2

Why does the study of money and banking focus special attention on
this group of financial institutions (depository institutions)?

Answer 2

Because they are involved in the creation of deposits, an important component of the money supply.

Question 3

What institutions are usually included in the depository institutions?

Answer 3

These institutions include commercial banks and the so-called thrift institutions (thrifts): savings and loan associations, mutual savings banks, and credit unions.

Question 3

These financial intermediaries raise funds primarily by issuing checkable deposits, and savings deposits.

Answer 3

Commercial banks

Question 4

Deposits on which checks can be written

Answer 4

Checkable deposits

Question 5

_________ obtain funds primarily through savings deposits (often called shares) and time and checkable deposits.

Answer 5

Savings and Loan Associations

Question 6

________ are very similar to savings and loans. They raise funds by accepting
deposits (often called shares) and use them primarily to make mortgage loans.

Answer 6

Mutual Savings Banks

Question 6

T or F. Since the 1980s, savings and loans were allowed to make mortgage loans and could establish checking accounts.

Answer 6

False. Until 1980, savings and loans were restricted to making mortgage loans and could not establish checking accounts.

Question 6

What legislation was passed during the early 1980s by congress regarding savings and loans?

Answer 6

Allowing them to offer checking accounts, make consumer loans, and pursue
many activities previously restricted to commercial banks.

Question 6

How do Mutual Savings Banks differ from S&Ls?

Answer 6

Mutual Savings Banks’ corporate structure is somewhat different from that of S&Ls in that they are always structured as “mutuals,” or cooperatives: the depositors own the bank.

Question 6

What is the result of the legislation made by Congress regarding savings, loans, and commercial banks?

Answer 6

The net result of this legislation is that the distinction between savings and loans and commercial banks has blurred, and these intermediaries have become more alike and much more competitive with each other

Question 7

How were the Mutual Savings Banks affected by the 1980s banking legislation?

Answer 7

Like savings and loans, until 1980 they were restricted to making mortgage loans, and they suffered similar problems when interest rates rose from the late 1960s to the early 1980s. They were similarly affected by the banking legislation in the 1980s and can now issue checkable deposits and make loans other than mortgages.

Question 8

How do credit unions acquire funds?

Answer 8

They acquire funds from deposits called shares and primarily make
consumer loans

Question 8

These financial institutions, numbering about 10,000, are very small cooperative lending institutions organized around a particular group: union members, employees of a particular firm, and so forth.

Answer 8

Credit Unions

Question 8

How were the credit unions affected by the 1980s banking legislation?

Answer 8

Credit unions are also allowed to issue checkable deposits and make mortgage loans in addition to consumer
loans.

Question 8

What makes the commercial bank the largest financial intermediary?

Answer 8

They have the most diversified portfolios (collections) of assets.

Question 9

_____________ are financial intermediaries that acquire funds at periodic intervals on a contractual basis.

Answer 9

Contractual savings institutions

Question 9

What is included under a Contractual savings institution?

Answer 9

• insurance companies (life insurance companies, fire and casualties insurance companies)
• pension funds (pension funds and government retirement funds)

Question 10

What feature does a Contractual savings institution that depository institutions do not have about losing funds?

Answer 10

They can predict with reasonable accuracy how much they will have to pay out in
benefits in the coming years,

Question 10

T or F. The liquidity of assets is not as important a consideration for depository institutions as it is for Contractual savings institutions, and they tend to invest their funds primarily in long-term securities such as corporate bonds, stocks, and mortgages.

Answer 10

False. The liquidity of assets is not as important a consideration
for them as it is for depository institutions.

Question 10

________ insure people against financial hazards following death and
sell annuities.

Answer 10

Life insurance companies

Question 10

How do Life insurance companies acquire funds?

Answer 10

They acquire funds from the premiums that people pay to keep their policies in force and use them mainly to buy corporate bonds and mortgages.

Question 11

T or F. Life insurance companies also purchase loans but are restricted in the amount that they can hold.

Answer 11

False. They purchase stocks not loans.

Question 11

Annual income payments upon retirement

Answer 11

Annuities

Question 12

These companies insure their policyholders against loss from theft, fire, and accidents.

Answer 12

Fire and Casualty Insurance Companies

Question 13

How do Fire and Casualty Insurance Companies differ from Life insurance companies?

Answer 13

They are similar in a way of receiving funds through premiums for their policies, but:
- they have a greater possibility of loss of funds if major disasters occur.
- they use their funds to buy more liquid assets than life insurance
companies do.

Question 14

What asset holdings do Fire and Casualty Insurance Companies have?

Answer 14

• municipal bonds (largest)
• they also hold corporate bonds and stocks - and U.S. government securities

Question 15

__________ provide retirement income in
the form of annuities for employees who are covered by a pension plan.

Answer 15

Pension Funds and Government Retirement Funds

Question 16

How do Pension Funds and Government Retirement Funds acquire funds?

Answer 16

Funds are acquired by contributions from employers or from employees, who either have a contribution automatically deducted from their paychecks or contribute voluntarily.

Question 16

What are the largest asset holdings of pension funds?

Answer 16

corporate bonds and stocks.

Question 16

How did the federal government actively encourage the establishment of a pension
funds?

Answer 16

• through legislation requiring pension plans.
• through tax incentives to encourage contributions.

Question 16

This category of financial intermediaries includes finance companies, mutual funds, and money market mutual funds.

Answer 16

Investment Intermediaries

Question 17

They lend funds to consumers, who make purchases of such items as furniture, automobiles, and home improvements, and to small businesses.

Answer 17

finance companies

Question 17

Ways in which finance companies raise funds

Answer 17

• by selling commercial paper (a short-term debt instrument)
• by issuing stocks and bonds

Question 17

T or F. Some finance companies are organized by a parent corporation to help sell their products.

Answer 17

True

Question 18

_______ allows shareholders to pool their resources so that they can take advantage of lower transaction costs when buying large blocks of stocks or bonds.

Answer 18

Mutual Funds

Question 19

How do Mutual Funds acquire funds?

Answer 19

selling shares to many individuals and use
the proceeds to purchase diversified portfolios of stocks and bonds

Question 19

T or F. Mutual funds allow shareholders to hold more diversified portfolios than they otherwise would.

Answer 19

True.

Question 20

These relatively new financial institutions have the characteristics of a mutual fund but also function to some extent as a depository institution because they offer deposit-type accounts.

Answer 20

Money Market Mutual Funds

Question 20

How do Money Market Mutual Funds
raise funds?

Answer 20

Like most mutual funds, they sell shares to acquire funds that are then used to buy money market instruments that are both safe and very liquid. The interest on these assets is then paid out to the shareholders.

Question 21

Why are investments in Mutual funds considered risky?

Answer 21

Shareholders can sell (redeem) shares at any time, but the value of these shares will be determined by the value of the mutual fund’s holdings of securities. Because these fluctuate greatly, the value of mutual fund shares will too; therefore, investments in mutual funds can be risky.

Question 22

What is the key feature of money market mutual funds?

Answer 22

A key feature of these funds is that shareholders can write checks against the value of their shareholdings.