Question 1

A financial institution that provides an underwriting service will only on occasion also provide a brokerage and/or dealer service.

Accepted Answer

This statement is incorrect. A financial institution may provide all three services: underwriting, brokerage, and dealer. Underwriting involves assuming the risk of a security issue, brokerage involves acting as an intermediary between a buyer and a seller, and dealer involves trading securities for profits. Many financial institutions provide all three services to their clients.

Question 2

Asset management firms receive their compensation ________ from management fees charged based on the market value of the assets managed for clients.

Accepted Answer

Asset management firms primarily receive their compensation from management fees charged based on the market value of the assets managed for clients. Other sources of revenue such as performance fees, commissions, and advisory fees may contribute to their revenue, but management fees are the primary source of compensation.

Question 3

An important risk that is often overlooked but has been the cause of the demise of some major financial institutions is value-at risk.

Accepted Answer

Value-at-Risk (VaR) is a widely used risk management tool that estimates the potential loss in value of a portfolio over a defined period for a given confidence interval. Rather than being an overlooked risk, it is a method to quantify and manage risk. The demise of financial institutions is often due to inadequate risk management practices or failure to properly account for or understand the risks, rather than the concept of VaR itself.

Question 4

In addition to uncertainty about the timing and amount of the cash outlays, and the potential for the depositor or policyholder to withdraw cash early or borrow against a policy, a financial institution has to be concerned with possible reduction in cash inflows.

Accepted Answer

Uncertainty about cash inflows is a valid concern for financial institutions because depositors or policyholders may withdraw funds early or not make their payments on time. This can result in a reduction in the amount of cash that a financial institution has on hand, which can impact its ability to meet its financial obligations.

Question 5

Many large manufacturing firms have subsidiaries that provide financing for the parent company's customer. These financial institutions are called free investment companies.

Accepted Answer

The correct term for the financial institutions owned by large manufacturing firms is captive finance companies, not free investment companies.

Question 6

In regards to Type-IV Liabilities, there are numerous insurance products and pension obligations that present uncertainty as to both the amount and the timing of the cash outlay.

Accepted Answer

Type-IV liabilities are those liabilities that present uncertainties in both the amount and the timing of the cash outlay. Insurance products and pension obligations are examples of Type-IV liabilities.

Question 7

The term hedge fund is associated with common characteristics. Which of the below is NOT one of these common characteristics?

Accepted Answer

The statement "have an investor base comprising modest-income individuals" is not true for hedge funds. Hedge funds typically have high minimum investment requirements and their investor base is dominated by wealthy individuals and institutional investors.

Question 8

Business entities include nonfinancial and financial enterprises. Nonfinancial enterprises manufacture products (e.g., cars, steel, computers) and/or provide nonfinancial services (e.g., transportation, utilities, computer programming).

Accepted Answer

This statement is true. Business entities can be categorized into nonfinancial and financial enterprises, with nonfinancial enterprises being involved in the production of goods or provision of services.

Question 9

Very few regulations and tax considerations influence the investment policies that financial institutions pursue.

Accepted Answer

Regulations and tax considerations have a significant impact on the investment policies of financial institutions. For example, there are regulations on the types of investments that banks can make, and tax considerations may influence the decision to invest in certain assets.

Question 10

Which of the following statements is FALSE?

Accepted Answer

Asset management firms are typically ranked based on assets under management, not liabilities under management.

Question 11

Which of the below is NOT one of the types of funds managed by asset management firms?

Accepted Answer

Deregulated investment companies are not one of the types of funds managed by asset management firms. The other options, including insurance company funds, separately managed accounts, pension funds, and hedge funds, are all commonly managed by asset management firms.

Question 12

There is no universally accepted definition to describe the 9,000 privately pooled investment entities in the United States called ________ that invest more than $1.3 trillion in assets.

Accepted Answer

The description fits that of hedge funds, which are privately pooled investment entities that manage large sums of assets, often investing in unconventional ways to generate high returns. Both A) derivative funds and B) option funds tend to focus on specific financial instruments, while D) asset/liability funds are a type of investment vehicle used by pension funds and insurance companies to manage their own assets and liabilities.

Question 13

Liquidity risk is the risk that a counterparty in a trade fails to satisfy its obligation.

Accepted Answer

Liquidity risk refers to the risk that an entity will not be able to meet its financial obligations as they come due because it cannot convert assets to cash quickly enough or at a reasonable price. The risk you described is more accurately termed as "counterparty risk" or "credit risk."

Question 14

Many large manufacturing firms have subsidiaries that provide financing for the parent company's customer. These financial institutions are called captive finance companies.

Accepted Answer

Captive finance companies are indeed subsidiaries of large manufacturing firms that provide financing for the parent company's customers.

Question 15

________ seeking the services of an asset management firm typically do not allocate all of their assets to one asset management firm firm.

Accepted Answer

Larger institutional clients often diversify their asset management by allocating their assets across multiple firms to mitigate risk and access specialized services.

Question 16

For Type-IV Liabilities, both the amount and the timing of the liabilities are known with certainty.

Accepted Answer

Type-IV Liabilities, also known as contingent liabilities, are not known with certainty in terms of amount or timing, as they depend on the outcome of a future event.

Question 17

There are various ways to categorize the different types of hedge funds. Mark Anson uses the four broad categories. Which of the below is NOT one of these?

Accepted Answer

The four broad categories described by Mark Anson are market directional, event-driven, relative value, and opportunistic. "Divergence buying" is not one of these categories.

Question 18

People who work for financial intermediaries (such as a commercial bank and an investment company) include investment professionals who are trained to analyze financial assets and manage them.

Accepted Answer

This statement accurately describes the roles of professionals who work for financial intermediaries.

Question 19

Most transactions made today are done with cash more so than payments mechanisms that use checks, credit cards, debit cards, and electronic transfers of funds.

Accepted Answer

This statement is false. Most transactions made today are actually done using payments mechanisms such as credit cards, debit cards, and electronic transfers of funds, rather than cash or checks.

Question 20

Funding liquidity risk is the risk that the financial institution will be unable to obtain funding to obtain cash flow necessary to satisfy its obligations.

Accepted Answer

This is the correct definition of funding liquidity risk.

Quiz 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms