Deck 16: Exploring Various Aspects of Pension Funds, Finance Companies, and Insurance Industry

Question 1

Life insurance companies are a relatively recent addition to the financial system of the United States; the first American life insurance firm began operations during the Civil War period.

Answer 1

False

Question 2

The insurance principle states that certain risks (such as the risk of death) are highly predictable for any one individual.

Answer 2

False

Question 3

Mutual funds investing in shares of mutual funds are known as super-mutuals.

Answer 3

False

Question 4

In recent years, U.S. life insurers have increased their holdings of commercial mortgages and reduced their investments in one- to four-family residential mortgages.

Question 5

Corporate stocks represent more than 60 percent of the mutual-fund industry's assets.

Question 6

Life insurance companies buy mostly state and local government securities rather than federal government securities for their investment portfolios.

Question 7

Investment companies buy mostly state and local government securities rather than federal government securities for their investment portfolios.

Question 8

The principal asset held by private pension funds is corporate notes and bonds.

Question 9

The principal asset held by state and local government employee retirement funds is corporate bonds.

Question 10

The gradual aging of the general population in the U.S. and several other nations tends to accelerate the growth of pension funds.

Question 11

Loans made by consumer finance companies are considered to be more risky than consumer installment loans granted by banks, credit unions, savings and loan associations and other installment lenders.

Question 12

Finance companies' share of the consumer loan market has fallen in recent years, while commercial banks and credit unions have enlarged their share of that market.

Question 13

The principal asset held by mutual funds is corporate bonds.

Question 14

The bulk of life insurance companies' funds is invested in short-term, high-yield securities.

Question 15

Insurance companies invest in long-term securities due to their high predictability of cash inflows and outflows.

Question 16

In order to increase their yield and, therefore, their income most life insurance companies turn over their portfolios frequently.

Question 17

Because of their high yields life insurance companies invest most of their funds in corporate stock.

Question 18

The insurance principle states that individual risk can be predicted with great accuracy.

Question 19

Loans to policyholders further increase the stability of cash flows for the insurance industry.

Question 20

Since the life insurance industry is "vested with the public interest," there is no need for regulation of this industry.

Question 21

Most insurance companies have expanded into the property-casualty insurance industry because of the greater stability it affords.

Question 22

Property-casualty insurers have diversified into many different lines in order to reduce risk.

Question 23

Because property-casualty insurance companies are taxed virtually the same as other corporations, tax-exempt bonds are very attractive to them.

Question 24

Most property-casualty insurance firms plan to break even on their insurance product lines and earn income on their investments.

Question 25

Property-casualty insurance firms are relatively unaffected by the business cycle.

Question 26

Pension funds have little need for liquidity because their cash inflows and outflows tend to be highly predictable.

Question 27

Interest income and capital gains are federal tax-exempt for pension funds.

Question 28

The mix of assets held by a pension fund is usually up to the discretion of the fund manager without any significant restrictions.

Question 29

Because of the aging of the population, pension fund growth is expected to increase.

Question 30

Commercial finance companies focus principally on accounts receivable financing and factoring to business customers.

Question 31

Most finance companies are heavy users of debt in financing their operations.

Question 32

By purchasing shares in an investment company small investors can get greater price stability and reduced risk in their investments.

Question 33

Investment company shareholders determine the policy for investing funds followed by each investment company.

Question 34

With universal life insurance policy premium payments can be varied in amount and timing by the policyholder.

Question 35

The trend toward consolidation is affecting the finance company industry today but not life insurance companies.

Question 36

Several state regulatory agencies have restricted life insurance companies from additional purchases of junk bonds.

Question 37

The U.S. life insurance industry's population reached a high of almost 2,350 in 1988 and has been falling since that time.

Question 38

GICs have helped to reduce insurance company risk in recent years by stabilizing their sources of funds and lowering the average cost of life insurance company funding.

Question 39

One area of growing insurance needs, according to the text, is small businesses.

Question 40

In 2008, about 40 percent of pension fund assets were corporate stocks.

Question 41

The Financial Accounting Standards Board requires businesses to make projections of their future pension obligations.

Question 42

The Financial Accounting Standards Board requires unfunded pension benefits to be reported as an intangible asset.

Question 43

According to the textbook, private pension plans are more heavily regulated than government pension plans.

Question 44

An investment company that purchases securities from firms in trouble or those that have filed for bankruptcy in the hope of scoring exceptional returns should the troubled firms recover is known as a reorganization fund.

Question 45

Pension fund assets are likely to grow rapidly over the next few decades as more workers retire.

Question 46

Sales finance companies make personal cash loans to individuals.

Question 47

Finance companies typically charge higher interest rates than do banks because they make higher risk loans.

Question 48

A symbiotic is a conglomerate financial firm that offers a variety of financial services under one roof.

Question 49

Mortgage banks are similar to savings and loans in that they hold most of the mortgages they originate.

Question 50

Hedge funds are really private partnerships that sell shares to only a limited number of investors.

Question 51

The assets of an investment company are managed by its board of directors.

Question 52

Most new insurance companies in recent years have been stockholder owned.

Question 53

Business loans are the most important financial assets held by finance companies.

Question 54

The primary problem with mutual fund rating firms such as Morning star is that they can only rate mutual funds based on future performance.

Question 55

Because markets are efficient, those mutual funds that are professionally managed will always outperform index mutual funds.

Question 56

Because of their high liquidity needs and safety requirements, most pension funds invest heavily in money market mutual funds.

Question 57

Ironically, even though finance companies and commercial banks are often direct competitors, many banks own finance companies.

Question 58

For pension funds, defined benefit plans promise a specific monthly or annual payment to workers when they retire based upon how much they contribute each year to the fund.

Question 59

Today, the largest life insurers are converging with other financial-service industries to form huge multi-product businesses.

Question 60

The denial of any claims arising from "acts of war" has been a standard exclusion in most insurance policies for many years before the terrorist attacks of September 2001.

Question 61

Among the most rapidly growing investment companies of late are lifecycle funds that seem to be gradually replacing more traditional pension plans.

Question 62

Passage of the Pension Protection Act of 2006 has stimulated the growth of lifecycle funds because it encourages businesses to set up employee pension programs even for those employees not wishing to accumulate long-term savings.

Question 63

During the 1990s and early into the new century hedge funds became prominent and by 2006 held well over $1 trillion in industry assets.

Question 64

Hedge funds often ask for a minimal investment of at least $1 million or more, catering to the wealthy.

Question 65

Hedge funds are essentially regulated investment companies that almost anyone can start.

Question 66

Recent trends in the aggressive management of some hedge funds have led to calls for more extensive regulation of the industry, especially as these funds have begun to pursue smaller, more vulnerable and busters.

Question 67

One of the most prominent changes in mutual funds is greater use of derivatives, including financial futures, options and both credit and interest rate swap contracts.

Question 68

With mutual funds using more and more derivatives it has raised regulators concerns about the investor training on derivates.

Question 69

Cash balance pension funds tend to favor young workers, while they may actually reduce older workers benefits.

Question 70

Recently, a highly controversial form of pension plan, the cash balance plan, has appeared in an effort to reduce sponsoring employer's costs and provide added flexibility.

Question 71

In cash balance pension funds employers typically make a hypothetical contribution to an employee's retirement account equal to a percentage of that employee's annual salary and credit the employee's pension account with annual interest earnings based on a reference interest rate, such as the U.S. treasury bond rate.

Question 72

When an employer or converts from a traditional pension plan to a cash balance plan, the employer determines the accumulated value held in the old pension under each employee's name and may transfer all or only a portion of debt accumulated value into the employee's new account.

Question 73

The prime beneficiary of the cash balance pension plan is the employee.

Question 74

Pension plans represent the single largest group of investors in the stock market.

Question 75

In Europe many pension plans are required to record their assets at cost value.

Question 76

Federal reform legislation in 2005 required employers to fully fund their pension plans within seven years.

Question 77

Life insurance companies typically insure their policyholders or their beneficiaries against which of the following risks?

A) Premature death
B) Living too long
C) Serious illness or accident
D) All of the above
E) None of the above

Question 78

In making their investment decisions, life insurers pursue:

A) Maximum rate of return, regardless of the nature of the investment
B) Short-term investments which roll over into cash rapidly
C) Long-term investments promising income certainty and safety of principal
D) A and C above
E) None of the above

Question 79

The principal investment security held by life insurance companies is:

A) Corporate bonds
B) Corporate stock
C) Mortgages on farm, residential and commercial properties
D) U.S. government and federal agency securities
E) None of the above

Question 80

The principal reason life insurers hold U.S. Government securities in their asset portfolios is to:

A) Maximize interest income
B) Avoid call privileges which are attached to most corporate bonds
C) Satisfy state and federal regulations
D) Minimize their federal tax liability
E) None of the above