Question 1 IMPORTANT: 1. Please correctly indicate the version of your exam paper in the provided answer sheet. Not or incorrectly answering this question will result in incorrect grading of your paper and subject to 1 mark penalty . What is the version of your exam paper? A. Version A B. Version B Please choose A for question 1 in the answer sheet. Specialness of Financial Intermediaries and Regulation 2. What is the most important factor driving the change in Australian financial service regulation framework from industry-based to function-based? A. Banking industry became relatively more important than other financial industries B. Banking industry became relatively less important than other financial industries C. The distinction between the activities of different types of financial industry institutions became blurred D. The financial industry needed a stronger regulation. E. None of the above. 3. Financial intermediaries could address the agency costs associated with investments better than individual households, because agglomerating funds of individual households helps: A. To avoid free-rider problem. B. To reduce costs of information collection and monitoring. C. To develop new secondary securities to more effectively monitor owners/managers of invested companies. D. Both A and B. E. All of A, B and C. 4. FIs perform their intermediary function via A. Transforming assets by purchasing primary securities and issuing secondary securities. B. Transforming assets by making efficient transactions. C. Transforming assets by purchasing secondary securities and issuing primary securities. D. Specializing as brokers between households and corporations by purchasing primary securities and issuing secondary securities. E. Specializing as brokers between households and corporations by purchasing secondary securities and issuing primary securities. 5. Which of the following statements is true? A. APRA is responsible for market integrity and consumer protection across the financial system. B. RBA is responsible for market integrity and consumer protection across the financial system. C. ASIC is responsible for prudential supervision. D. APRA is responsible for prudential supervision. E. ASIC is responsible for monetary policies. 6. Which of the following is (are) reason(s) for the specialness of financial intermediaries? A. Lower average information costs. B. Lower average transaction costs. C. Lower price risk and superior liquidity attributes of financial claims to household savers. D. Only A and C. E. All of A, B and C. Credit Risk 7. Bank ABC has a loan lent to firm DEF. The interest rate charged for this loan is 8% per annum. The bank also charges various fees which amount to 2% of the loan amount per annum. The compensating balance (b) is 5%, and there is 10% reserve requirement (RR). What is the contractually promised rate of return on this loan (rounded to the closest basis points, i.e., 0.01%)? A. 8.38% B. 8% C. 6.70% D. 10.48% E. 1.68% 8. The contractually-promised return on a 1-year loan is 15% per annum. If the borrower defaults, 90% of the principal and interest payments are expected to be recovered. If the borrower is expected to default with a 20% probability, what is the expected rate of return on this loan? A. 15% B. 12.7% C. 12% D. 5.8% E. -8% 9. Which of the following statements does NOT reflect credit decisions at the retail level? A. Loans are typically of small size. B. The financial institutions usually control the credit risk by limiting the quantity of loans made available to retail borrowers and credit rationing. C. The financial institutions rely mainly on the pricing tool, i.e., setting a higher interest rate for riskier borrowers, to address credit risk. D. It is economically inefficient to collect detailed information about borrowers’ credit quality. E. Usually a standard loan rate is charged. 10. What is/are the problem(s) with the linear discriminant model for default risk? A. Factors i…
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