Deck 26: Pension Fund Operations

Question 1

To reduce interest rate risk, pension fund managers can

A)shift from variable-rate to fixed-rate bonds.
B)increase the average maturity on fixed-rate bonds.
C)sell bond futures contracts.
D)reduce the investment in money market securities.

Answer 1

C

Question 2

The asset composition of private pension portfolios is most heavily concentrated in

A)corporate bonds.
B)mortgages.
C)common stock.
D)money market securities.

Answer 2

C

Question 3

In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans.

Answer 3

False

Question 4

Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved.

Question 5

The government agency that guarantees that participants in defined-benefit plans will receive their benefits upon retirement is the

A)Federal Pension Insurance Corporation.
B)Pension Benefit Guaranty Corporation.
C)Office of Pension Insurance.
D)Employee Pension Protection Bureau.

Question 6

Nonqualified private pension plans offer tax deferral benefits to employees, but with qualified plans, income is taxed before it is contributed to the plan.

Question 7

Pension funds managed by life insurance companies are normally referred to as

A)trust portfolios.
B)insured plans.
C)matched plans.
D)projective plans.

Question 8

A ____ plan allows a firm to know with certainty the amount of funds to contribute. A ____ plan allows a firm to know with certainty the amount of benefits that must be provided.

A)defined-benefit; defined-benefit
B)defined-contribution; defined-contribution
C)defined-contribution; defined-benefit
D)defined-benefit; defined-contribution

Question 9

The composition of the stocks in a pension fund's portfolio is determined by the fund's portfolio managers.

Question 10

A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.

Question 11

With a ____ funding strategy, investment decisions are made with the objective of generating cash flows that match planned outflow payments.

A)matched
B)mixed
C)projective
D)None of these are correct.

Question 12

To deal with the problem of underfunded pension plans, Congress passed the ____________ of 2006.

A)Pension Protection Act
B)Employee Retirement Income Security Act
C)Retirement Reform Act
D)Pension Benefit Guaranty Corporation Act

Question 13

If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matched funding and projective funding, ____ is more flexible for portfolio managers.

A)matched funding; matched funding
B)projective funding; matched funding
C)projective funding; projective funding
D)matched funding; projective funding

Question 14

Investing in a bond index portfolio is an example of a(n)____ approach. Investing in an equity portfolio that mirrors the stock market is an example of a(n)____ approach.

A)passive; active
B)active; active
C)active; passive
D)passive; passive

Question 15

Projective funding limits the manager's discretion, allowing only investments that match future payouts.

Question 16

Underfunded pension plans are primarily a problem with defined-contribution pension plans.

Question 17

A pension fund manager might hedge against interest rate movements by selling bond futures contracts.

Question 18

Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans.

A)defined-benefit
B)defined-contribution
C)beneficiary
D)guarantor-insured

Question 19

A pension plan that provides benefits that are determined by the accumulated contributions and return on the fund's investment performance is called a ____ plan.

A)defined-benefit
B)defined-contribution
C)beneficiary
D)guarantor-insured

Question 20

Pension funds managed by life insurance companies concentrate on

A)common stock.
B)bonds and mortgages.
C)preferred stock.
D)money market instruments.