Deck 13: Nondepository Financial Institutions

Question 1

A stock life insurance company is owned and controlled by its

A) partners.
B) managers.
C) stockholders.
D) policyholders.

Answer 1

D

Question 2

Pension plans in which employee benefits are set by the plan and the employer contributions are adjusted to meet those benefits is called a

A) defined benefit plan.
B) defined contribution plan.
C) a fully vested plan.
D) an unfunded plan.

Answer 2

A

Question 3

Over 90 percent of life insurance companies are structured as __________ companies. Over 50 percent of industry assets are controlled by companies structured as __________ companies.

A) mutual, mutual
B) mutual, stock
C) stock, mutual
D) stock, stock

Answer 3

C

Question 4

Suppose a new employee is promised a pension payment of $8000 in the twenty-fourth year after joining the firm. The current pension contribution is $1200 a year. Assuming a six percent rate of return, their pension plan is said to be

A) fully funded.
B) partly funded.
C) unfunded.
D) fully vested.

Question 5

Until the 1980s most private pension plans were "defined __________" plans under which the periodic employer payment into the plan was __________.

A) benefit; variable
B) benefit; preset
C) contribution; variable
D) contribution; preset

Question 6

An employee who retains earned pension benefits after leaving a job has a pension plan that is

A) whole life.
B) guaranteed.
C) vested.
D) funded.

Question 7

A type of life insurance with separate pure-insurance and savings components is

A) whole life insurance.
B) universal life insurance.
C) term life insurance.
D) group life insurance.

Question 8

For term life insurance, the policy holder pays

A) premiums based on current interest rates.
B) a constant premium.
C) premiums that vary with mortality risk.
D) constantly declining premiums.

Question 9

Suppose a new employee is promised a pension payment of $8000 in the twenty-fourth year after joining the firm. The current pension contribution of $1200 a year. Assuming an eight percent rate of return, this pension plan is said to be

A) fully funded.
B) partly funded.
C) unfunded.
D) fully vested.

Question 10

For a whole life policy, the policy holder pays

A) premiums based on current interest rates.
B) a constant premium.
C) premiums that vary with mortality risk.
D) constantly declining premiums.

Question 11

A mutual life insurance company is owned and controlled by its

A) partners.
B) managers.
C) stockholders.
D) policyholders.

Question 12

In a(n)__________ insurance policy, there is no savings component.

A) whole
B) term
C) universal
D) variable

Question 13

A fully funded pension liability is one in which

A) the Pension Benefit Guaranty Corporation insures full benefit payments.
B) enough money has been set aside to ensure that the promised pension can be paid out after allowing for interest payments.
C) the yield on the pension fund is equal to the inflation rate.
D) corporation pension contributions are equal to employee contributions.

Question 14

Pension plans in which employer contributions are set by the plan and benefits depend on the performance of the assets in the plan is called a

A) defined benefit plan.
B) defined contribution plan.
C) a fully vested plan.
D) an unfunded plan.

Question 15

Life insurance companies are supervised and regulated by the

A) Federal Home Loan Bank Board.
B) Securities and Exchange Commission.
C) states in which they operate.
D) Federal Reserve.

Question 16

In recent years the life insurance industry has emphasized

A) whole life policies.
B) group insurance.
C) less risky investments.
D) the purchase of short-term assets.

Question 17

In a(n)__________ insurance policy, the savings component pays a money market rate of interest that changes with market conditions.

A) whole
B) term
C) universal
D) variable

Question 18

Life insurance companies have increased their purchases of corporate stock in recent years in an effort to

A) reduce risk.
B) increase asset returns.
C) increase liquidity.
D) reduce taxes.

Question 19

In a(n)__________ insurance policy, the savings component is allocated among a menu of investment options.

A) whole
B) term
C) universal
D) variable

Question 20

Universal life insurance was created in response to

A) the popularity of whole life insurance.
B) the popularity of variable life insurance.
C) high interest rates.
D) deregulation of banking.

Question 21

By requiring minimum reporting, disclosure, vesting, funding, and investment standards, the __________ helps safeguard employee pension rights.

A) Employee Retirement Income Security Act
B) Federal Deposit Insurance Corporation
C) Social Security Act
D) Federal Reserve

Question 22

Compared with the average man, the average woman pays

A) less for health insurance but more for life insurance.
B) less for life insurance but more for health insurance.
C) more for life and health insurance.
D) less for life and health insurance.

Question 23

Property and casualty insurance companies tend to invest heavily in municipal bonds because

A) the bonds have higher yields than corporate bonds.
B) property and casualty insurance companies are required by regulators to hold at least 20 percent of their assets in the form of municipal bonds.
C) the bonds are tax-exempt.
D) they hold large state and local government pension funds, thus requiring them to hold an equal amount of municipal bonds.

Question 24

In dollar terms the most important of all forms of property and casualty insurance is

A) automobile liability insurance.
B) home owners insurance.
C) medical malpractice insurance.
D) fire insurance.

Question 25

Mutual funds that offer shares that are redeemable are referred to as

A) open-end.
B) closed-end.
C) negotiable.
D) nonnegotiable.

Question 26

Property and casualty insurance companies are supervised and regulated by the

A) Federal Home Loan Bank Board.
B) Securities and Exchange Commission.
C) states in which they operate.
D) Federal Reserve.

Question 27

Assume that a no-load open-end mutual fund holds securities with a total market value of $20 million, has no liability, and has 250,000 shares outstanding. The net asset value par share of this fund is

A) $5 million.
B) $80 million.
C) $5.
D) $8.

Question 28

__________ contributions to a defined __________ pension plan are tax-deferred until retirement.

A) Employer; benefit
B) Employer; contribution
C) Employee; benefit
D) Employee; contribution

Question 29

Mutual funds that offer limited shares that are not redeemable are referred to as

A) open-end.
B) closed-end.
C) negotiable.
D) nonnegotiable.

Question 30

Pension funds are partially guaranteed by the

A) Social Security Administration.
B) Federal Deposit Insurance Corporation.
C) Federal Reserve.
D) Pension Benefit Guaranty Corporation.

Question 31

The portfolios of property and casualty insurance companies are generally concentrated in

A) liquid assets.
B) mutual funds.
C) primary securities.
D) U.S. Treasury bonds.

Question 32

The net asset value of an open-end mutual fund is equal to the

A) profits of the fund.
B) dividends paid out by the fund.
C) market value of the securities held by the fund.
D) price-earnings ratio of the fund.

Question 33

A portfolio manager for a property and casualty insurance company who anticipates a recession is likely to shift the company's portfolio into

A) short-term securities.
B) preferred stock.
C) common stock.
D) long-term corporate bonds.

Question 34

The problem of vesting and funding are avoided by __________ pension plans.

A) both defined benefit and defined contribution
B) defined benefit
C) defined contribution
D) neither defined benefit nor defined contribution

Question 35

Assume that a no-load open-end mutual fund holds securities with a total market value of $12 million, has no liability, and has 500,000 shares outstanding. The net asset value par share of this fund is

A) $24.
B) $60.
C) $24 million.
D) $60 million.

Question 36

Suppose a new employee is promised a pension payment of $8000 in the twenty-fourth year after joining the firm. The current pension contribution is $2000 a year. Assuming a six percent rate of return, this pension plan is said to be

A) fully funded.
B) partly funded.
C) unfunded.
D) fully vested.

Question 37

Which of the following types of insurance do men pay lower premiums than do women?

A) life insurance
B) health insurance
C) auto insurance
D) There are no legally allowed differences.

Question 38

Relative to life insurance companies, the liabilities of property and casualty insurance companies are

A) longer-term.
B) more unpredictable.
C) less risky.
D) subject to higher taxes.

Question 39

Because women have a longer average life span than men, they are paid

A) higher monthly retirement benefits by a defined benefit pension plan.
B) lower monthly retirement benefits by a defined benefit pension plan.
C) the same monthly retirement benefits by a defined benefit pension plan.
D) the amount of monthly benefits paid to men and women by a defined benefit plan is determined by each company.

Question 40

Because women have a longer average life span than men, they pay

A) more for health insurance.
B) less for health insurance.
C) more for life insurance.
D) less for life insurance.

Question 41

A mezzanine fund

A) will never buy equity in a company.
B) may buy only equity in a company.
C) may buy a combination of equity and convertible debt in a company.
D) may buy a combination of equity and straight debt in a company.

Question 42

Investment banks operate in the

A) secondary market.
B) primary market.
C) syndicated market.
D) money market.

Question 43

Unlike brokers, securities dealers

A) operate in secondary markets.
B) risk capital losses.
C) trade "used" securities.
D) operate in primary markets.

Question 44

The two major types of finance company are

A) captive and specialty.
B) public and private.
C) consumer and commercial.
D) insured and uninsured.

Question 45

The "primary" market is the market for

A) hostile takeovers.
B) newly-issued securities.
C) equities of "blue chip" companies.
D) league tables.

Question 46

A venture capital fund buys the __________ of a new company and hopes to profit from __________.

A) debt; repayment of the debt at maturity
B) debt; interest payments on that debt
C) equity; dividends from the equity
D) equity; eventual sale of that equity

Question 47

Banks in the United States still cannot

A) own finance companies.
B) be full-service brokers.
C) offer their own mutual funds.
D) offer merger advisory services.

Question 48

"Subordinated" debt is one form of __________ debt.

A) mezzanine
B) uncollateralized
C) zero-coupon
D) risk-free

Question 49

A mutual fund that charges a sales commission is a

A) load fund.
B) no-load fund.
C) closed-end fund.
D) premium fund.

Question 50

An Oldsmobile dealer may turn to a __________ like GMAC for loans in purchasing vehicles for his inventory.

A) investment bank
B) broker-dealer
C) bootstrap financing company
D) captive finance company

Question 51

"Bootstrap financings" are buyouts financed by

A) the company managers' own assets.
B) finance companies.
C) junk bonds.
D) new issuance of bonds.

Question 52

A leveraged buyout is

A) a form of short-term lending to finance companies when they buy a company.
B) the acquisition of a company financed by debt.
C) the sale of commercial paper to finance purchases of bundles of securitized non-traded loans.
D) borrowing by finance companies to make loans.

Question 53

Finance companies are the largest issuers of

A) commercial paper.
B) shares.
C) long-term securities.
D) repurchase agreements.

Question 54

Mezzanine debt funds hold quite __________ assets issued by __________ companies.

A) risky; small to midsized
B) risky; large
C) safe; small to midsized
D) safe; large

Question 55

The Gramm-Leach-Bliley Act of 1999

A) allowed the creating of financial holding companies.
B) set conditions under which an FHC can set up a merchant bank.
C) brings the U.S. closer to the universal banking model.
D) does all of the above.

Question 56

Venture capital funds invest in the equity of

A) start-up companies.
B) IPOs.
C) hedge funds.
D) convertible debt.

Question 57

Which of the following would likely be involved in a new bond offering?

A) a commercial bank
B) an investment bank
C) a broker
D) a dealer

Question 58

Management structures that include money market funds and bond funds in addition to stock funds are known as

A) exchange-traded funds.
B) dealers.
C) brokers.
D) families of mutual funds.

Question 59

Unlike dealers, brokers

A) deal in the primary market.
B) deal in equity and not in debt.
C) do not buy or sell for their own account.
D) get most of their funds from consumer deposits.