Deck 26: Pension Fund Operations

Question 1

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

Answer 1

B

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

A ____ plan allows a firm to know with certainty the amount of funds to contribute. The ____ 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 5

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 the above

Question 6

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.

Question 7

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

Question 8

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

Question 9

In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans.

Question 10

Pension funds managed by life insurance companies concentrate on

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

Question 11

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

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

Question 12

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 13

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

Question 14

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 15

Public pension funds can be classified by the manner in which contributions are received and benefits are paid.

Question 16

Most pension fund contributions are contributed by the

A) employer.
B) employee.
C) state government.
D) federal government.
E) none of the above

Question 17

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

Question 18

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 matchedfunding 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 19

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 20

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