Deck 16: Mutual Funds, Insurance Companies, Investment Banks, and Other Financial Firms

Question 1

The majority of benefit payments by life insurance companies are made to beneficiaries of deceased policyholders rather than living policyholders.

Answer 1

False

Question 2

The longer maturities of commercial mortgages help explain the growth of lending in this area by life insurance companies.

Answer 2

False

Question 3

The Financial Accounting Standards Board requires all pension funds to be fully funded by the year 2000.

Answer 3

False

Question 4

Loans to policyholders of life insurance companies have increased greatly during the past 20 years, including the decade of the 1980s.

Question 5

Life insurers have been forced by deregulation and the appearance of new competitors to offer market-sensitive rates of return to customers on most of their services, which has reduced profits and driven out smaller and less-efficient firms.

Question 6

By the beginning of the 1990s the pension fund industry held about 15 percent of all junk bonds outstanding.

Question 7

An index fund follows the movement of a particular index, for example, the Consumer Price Index (CPI) and its value changes each month.

Question 8

Pension funds have been among the most rapidly growing of all financial intermediaries. Between 1980 and 2000, the assets of all private and public pension funds multiplied more than 10 times over, reaching more than $8 trillion in the United States alone in 2000.

Question 9

The startling collapse of Enron Corporation of Houston - the largest bankruptcy filing in U.S. history - in 2001 and 2002 aroused a storm of controversy about how employee retirement plans should be set up and managed.

Question 10

In 2006, financial assets held by mutual funds (Open-End Investment Companies) was right around $9.5 trillion.

Question 11

The total financial assets held by a life insurers in 2006 is around $7.5 trillion.

Question 12

Total financial assets outstanding for property-casualty insurers in 2006 was $820 billion.

Question 13

The approximate number of life insurance companies headquartered and operating in the United States is:

A) 1,700
B) 3,200
C) 4,600
D) 900
E) 400

Question 14

The volume of financial assets held by all life insurance companies in 2000 was about:

A) $100 billion
B) $500 billion
C) $800 billion
D) $3 trillion
E) $6 trillion

Question 15

During the 1990s and early into the new century hedge funds became prominent and night 2005 held assets well over

A) $100 million
B) $900 million
C) $1 trillion
D) $2 trillion
E) None of the above

Question 16

In 2006, financial assets held by mutual funds (opened and an investment companies) was right around

A) $5 trillion
B) $6 trillion
C) $6.5 trillion
D) $8.2 trillion
E) None of the above

Question 17

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

A) Five years
B) Seven years
C) Ten years
D) Twelve years
E) None of the above

Question 18

What advantages do investment companies offer the small saver? Why has their growth been so erratic in recent years?

Question 19

What is the principal function of pension funds? Explain why these institutions have been among the most rapidly growing financial institutions in recent years. Do you expect their growth to be faster or slower in the future? Why? What is the difference between a defined benefit and a defined contribution pension plan?

Question 20

Against what kinds of risk do life insurers protect their policyholders? How about property-casualty insurers?

Question 21

Compare and contrast the asset portfolios of life insurance companies with the asset portfolios of property-casualty insurers. Please try to explain any differences you are able to observe.

Question 22

What is happening to the mix of services offered by life insurers and property-casualty insurance companies? Why?

Question 23

What role do finance companies play in supplying funds to the financial marketplace? How many different kinds of finance companies are there?

Question 24

A growing sector within the general finance company industry consists of small-loan companies, which include pawnshops, title loans firms and check-cashing companies among others. What do these firms do? What kinds of customers do they serve primarily?

Question 25

What is a REIT? A mortgage bank? A leasing company? Why do you think these specialized financial institutions came into being? Have they faced any serious problems of late?

Question 26

What functions do security brokers and dealers perform within the financial system? Why are these security companies so important to the effective functioning of the money and capital markets?

Question 27

In the concluding section of this chapter several major trends affecting all financial institutions today are discussed. Identify these trends. Which ones do you see as long-term trends likely to continue indefinitely into the future? Which may be short-lived (if any)? Please explain your answer.

Question 28

The manager of a life insurance company is trying to decide what annual premium to charge a group of policyholders, each of whom has just reached his or her 40th birthday. A check of mortality tables indicates that, for every million persons born 40 years ago, 3 percent die, on average, sometime during their 40th year. If the company has 10,000 policyholders in this age bracket and each has taken out a $50,000 life insurance policy, estimate the probable amount of death benefit claims against the company.
How much must be charged in required premiums to each customer wanting a life insurance policy just to cover these expected claims? Suppose the company has operating expenses (plus a target profit) on policy sales to these policyholders of $500,000. What annual premium must be charged each policyholder to recover expenses and meet expected benefit claims?

Question 29

An employee has just joined SONY Corporation and a pension plan is set up in her name under which the company will contribute $5,000 per year and the employee herself will contribute $1,000 per year. How much will this year's contributed funds be worth in 10 years if the pension plan pledges a 7 percent annual return on each dollar saved? Suppose the employee plans to retire in 10 years. How much will be available in total at retirement if the company and employee contribute the amounts noted above each year for the next 10 years and this employee owns (is vested with) the full amount of savings contributed to the pension plan? If the pension promises an annual annuity rate of 6 percent given this employee's life expectancy, what annual retirement income can she expect?

Question 30

Delbert Ray is planning to retire this year and draw upon the accumulated savings in his pension plan which amounts to $205,800. Mr. Ray is vested with 80 percent of the accumulated funds and, based on his life expectancy, has been promised an annual annuity (income) rate of 3.5 percent. What is Delbert Ray's expected retirement income from his pension plan?

Question 31

Drawing upon the discussion in this chapter on measuring and evaluating the performance of a financial institution, please calculate as many measures of this firm's performance as you can. Do you notice any performance measures that the management of this institution might wish to investigate for possible problems?
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Question 32

Recall: ROE = Net after-tax income/Total equity capital and ROA = Net after-tax income/Total assets