Deck 12: What Financial Institutions Do

Question 1

Which of the following increased its share of the percentage of total assets of financial intermediaries by the most between 1960 and 2006?

A)Money market mutual funds
B)Other mutual funds
C)Private pension funds
D)Commercial banks

Answer 1

Other mutual funds

Question 2

Which of the following is a securities market institution?

A)The New York Stock Exchange
B)Greater Illinois Savings and Loan
C)Prudential Insurance Company
D)Fidelity Magellan Mutual Fund

Answer 2

The New York Stock Exchange

Question 3

Why was the Securities and Exchange Commission established?

A)To ensure that "noise trading" on the New York Stock Exchange did not become excessive
B)To regulate the commission charged by stockbrokers
C)In response to disreputable underwriting practices
D)In response to the financial panic of 1907

Answer 3

In response to disreputable underwriting practices

Question 4

Securities market institutions

A)include insurance companies and pension funds.
B)include commercial banks.
C)include mutual funds.
D)are not financial intermediaries.

Question 5

Which of the following is a contractual saving institution?

A)The New York Stock Exchange
B)Greater Illinois Savings and Loan
C)Prudential Insurance Company
D)Fidelity Magellan Mutual Fund

Question 6

Which of the following decreased its share of the percentage of total assets of financial intermediaries between 1960 and 2006?

A)Commercial banks
B)Private pension funds
C)State and local government retirement funds
D)Life insurance companies

Question 7

Underwriting involves

A)insuring the life or health of individuals.
B)guaranteeing a price for new capital to the issuing firm.
C)selling stock more cheaply than conventional stockbrokers.
D)issuing stock and using the proceeds to buy bonds.

Question 8

Investment banks

A)lease machinery and equipment to business firms.
B)acquire deposits from savers and lend them to borrowers.
C)assist business firms in raising new capital in primary markets.
D)aid the government to raise funds to cover the budget deficit.

Question 9

If an investment bank underwrites an issue on an "all-or-none" basis,

A)the issuing company receives nothing unless the investment bank sells the complete issue at the offering price.
B)the issuing company receives the guaranteed price even if the investment bank sells none of the issue.
C)the investment bank makes no guarantee and is required to sell to investors only as much of the issue as it can.
D)the investment bank will raise the indicated funds from an issue that is either all stock or all bonds.

Question 10

If an investment bank underwrites an issue on a "best efforts" basis,

A)the issuing company receives nothing unless the investment bank sells the complete issue at the offering price.
B)the issuing company must pay the investment bank's fee only if the investment bank is found to have done its best to market the security issue.
C)the investment bank makes no guarantee and is required to sell to investors only as much of the issue as it can.
D)the investment bank will raise the indicated funds from an issue that is either all stock or all bonds.

Question 11

Why did the risks associated with underwriting bond issues rise during the 1980s?

A)Because rising federal taxes forced a number of issuing firms close to bankruptcy
B)Because of the higher volatility of interest rates
C)Because accelerating inflation during the decade led to ever-increasing bond prices
D)Because excessive government regulation reduced the profitability of underwriting

Question 12

Why are securities market institutions not considered to be financial intermediaries?

A)Because they have no direct dealings with the general public
B)Because they don't acquire funds from savers to invest in borrowers
C)Because they are not allowed to pay interest on the deposits they receive
D)Because they fail to provide the services of risk-sharing, liquidity, and information

Question 13

Which of the following is a depository institution?

A)The New York Stock Exchange
B)Greater Illinois Savings and Loan
C)Prudential Insurance Company
D)Fidelity Magellan Mutual Fund

Question 14

Which of the following had the largest percentage of total assets of financial intermediaries in the United States?

A)Money market mutual funds
B)Life insurance companies
C)Private pension funds
D)Commercial banks

Question 15

The most important service provided by underwriters is

A)lowering of information costs.
B)dealing with problems of moral hazard.
C)insuring firms against loss from fire.
D)insuring firms against loss from employee theft.

Question 16

Which of the following is not a leading underwriting firm?

A)Merrill Lynch
B)First Boston
C)Fidelity Magellan Fund
D)Goldman Sachs

Question 17

In investment banking the "spread" is the difference between

A)the value of a firm's assets and the value of its liabilities.
B)the bid and asked prices on a bond.
C)the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market.
D)the price of a new stock issue and the price of an equivalent new bond issue.

Question 18

Which of the following is NOT one of the three largest financial institutions in the world?

A)UBS
B)Mitsubishi UFJ Financial Group
C)Barclays Bank
D)Bank of America

Question 19

Which of the following is an investment institution?

A)The New York Stock Exchange
B)Greater Illinois Savings and Loan
C)Prudential Insurance Company
D)Fidelity Magellan Mutual Fund

Question 20

A syndicate is

A)a group of brokers illegally making use of insider information.
B)a group of commercial banks that agrees to accept the checks of each other's depositors.
C)a group of investment banks underwriting a large security issue.
D)a group of dealers that markets a government bond issue.

Question 21

Unlike brokers, dealers

A)buy and sell both stocks and bonds.
B)hold inventories of securities.
C)are unregulated by the federal government.
D)are taxed by the federal government but not by state and local governments.

Question 22

SEC Rule 415

A)decreased competition among security underwriters.
B)requires firms to sell an issue within two months of registering it with the SEC.
C)requires firms to choose an underwriter before registering a security.
D)led to underwriters taking positions in bonds on their own account.

Question 23

All of the following statements about junk bonds are true EXCEPT

A)they tend to be underwritten by merchant banks.
B)their ratings by Moody's is Baa or less.
C)their ratings by Standard & Poor's is BBB or less.
D)they are riskier than other bonds.

Question 24

A "tombstone" is a

A)company in danger of bankruptcy.
B)an advertisement of a new security issue by an investment bank.
C)a bond that has been defaulted on.
D)a share of stock in a failed company.

Question 25

By 2006, the primary growth area for investment banking was

A)Latin America.
B)Africa.
C)Australia.
D)Europe.

Question 26

Deleveraging

A)is another name for underwriting.
B)refers to underwriting carried out by merchant banks.
C)refers to investment banks helping firms reduce their debt burdens by raising equity in public markets.
D)refers to a takeover of a corporation by its management.

Question 27

Many issuers of stocks and bonds use underwriters for all of the following reasons EXCEPT

A)only licensed underwriters can issue stocks and bonds.
B)underwriters are skilled in collecting market information and communicating it to their clients.
C)investment bankers collect information on issuing firms and put their reputations on the line in issues they underwrite.
D)an investment bank's endorsement is particularly valuable for issuers that are less well know to small investors.

Question 28

A specialist is

A)a securities firm that deals in only one type of security.
B)an accountant trained in securities law.
C)a tax lawyer at a securites firm.
D)a broker-dealer on the floor of the New York Stock Exchange.

Question 29

What is the most liquid market in the world?

A)The market for gold
B)The market for U.S. Treasury bonds
C)The market for Japanese government bonds
D)The market for U.S. corporate bonds

Question 30

Merchant banking refers to

A)banking services available only to retail merchants.
B)banking services available to businesses but not to the general public.
C)investment banks investing their own funds in companies.
D)banking activities being carried out by companies that are not banks.

Question 31

What was the "big bang"?

A)The stock market crash of October 1987
B)The deregulation of financial markets in England in 1986
C)The Wall Street insider trading scandal of 1989
D)The explosion of short-term interest rates in 1981

Question 32

All of the following are part of Euronext (an integrated European stock exchange) EXCEPT

A)Paris Bourne.
B)London Exchange.
C)Amsterdam Exchange.
D)Brussels Exchange.

Question 33

SEC Rule 415

A)fixes the fees that may be charged by underwriters.
B)requires underwriters to invest their own funds in the firms whose securities they are underwriting.
C)eliminates the requirement that short-term securities be underwritten.
D)allows firms to wait as long as two years before selling a newly registered security.

Question 34

Securities dealers make most of their income from

A)commissions charged to buyers.
B)the spread between the bid and the asked price on securities.
C)reports they sell investors containing information on the securities they handle.
D)underwriting.

Question 35

Which of the following is true of the New York Stock Exchange?

A)It is an over-the-counter market.
B)It maintains a liquid central market for small and medium-sized investors.
C)It accounted for a larger fraction of all shares traded in the United States in 1991 than in 1971.
D)Trading on it takes place over the telephone and by computer.

Question 36

The largest firms in securities markets

A)act as both brokers and dealers.
B)act as brokers, but not as dealers.
C)act as dealers, but not as brokers.
D)act as neither brokers nor dealers.

Question 37

In an over-the-counter market trading takes place

A)face-to-face at the front counter of a securities firm.
B)on the floor of an exchange.
C)over the telephone or by computer.
D)at SEC-approved trading locations.

Question 38

Which of the following is NOT true of exchanges?

A)Securities are bought and sold in one physical location.
B)Securities are sold in an auction market.
C)The NYSE is an exchange.
D)The NASDAQ is an exchange.

Question 39

Buying and selling securities on the basis of insider information is against the law

A)in all cases.
B)only in the state of New York.
C)for those who obtained the information because of their position within the firms involved in the trade.
D)for those who, having obtained the information, refuse to divulge it to the general public.

Question 40

A firm with both auction market and over-the-counter capabilities was formed late in 1998 when

A)the New York and American Stock Exchanges merged.
B)the New York Stock Exchange merged with the Chicago Mercantile Exchange.
C)the National Association of Securities Dealers merged with the American Stock Exchange.
D)the American Stock Exchange merged with the Chicago Mercantile Exchange.

Question 41

Finance companies

A)issue stock and use the proceeds to purchase bonds.
B)raise funds in financial markets to lend to households and firms.
C)raise funds from banks to lend to households and firms.
D)issue bonds and use the proceeds to purchase stock.

Question 42

A load fund

A)charges a commission for purchases or sales.
B)is not obligated to redeem shares issued.
C)earns income only from management fees.
D)issues shares that may sell at a discount to the market value of the underlying assets.

Question 43

Under a current SEC proposal,

A)the majority of the directors of any individual mutual fund must be independent of the fund's sponsor.
B)funds that hold common stock may not also hold bonds.
C)funds that hold short-term assets may not also hold long-term assets.
D)the tax rate on returns to the fund would be greatly reduced.

Question 44

Which of the following statements is NOT true of consumer finance companies?

A)Their borrowers have higher default risk than bank customers.
B)They charge higher interest rates than banks do on similar loans.
C)They lend primarily to consumers.
D)They are strictly regulated by state governments.

Question 45

Factoring

A)involves selling stocks and using the proceeds to buy bonds.
B)is purchasing accounts receivable at a discount.
C)is calculating the optimal par values of stocks and bonds.
D)has been declared illegal under the Factoring Reform Act of 1994.

Question 46

The growth in self-directed retirement accounts (such as IRAs and 401(k) plans)

A)caused a decline in the total assets of mutual funds.
B)helped increase the growth in mutual funds.
C)led to a decline in stock prices relative to bond prices.
D)went almost entirely unregulated by the federal government.

Question 47

Many analysts think Electronic communications networks (ECNs) will become important executors of exchange-traded stocks because

A)they cater to institutional investors.
B)they will have an expanded presence in NASDAQ.
C)they offer low transaction costs and anonymity to large investors.
D)they seek out the small investor.

Question 48

Business finance companies

A)purchase accounts receivable of small firms at a discount.
B)sell commercial paper and buy long-term corporate bonds.
C)take in deposits from savers and buy corporate commercial paper.
D)are strictly regulated by state governments.

Question 49

The largest category of mutual funds is

A)money market mutual funds.
B)closed-end mutual funds.
C)load funds.
D)funds consisting of capital market instruments.

Question 50

Mutual funds

A)take in deposits from savers and make loans to borrowers.
B)sell shares to savers and purchase assets with the funds.
C)take in deposits from savers and purchase assets with the funds.
D)bring together small savers and small borrowers.

Question 51

All of the following are types of finance companies EXCEPT

A)government finance.
B)consumer finance.
C)sales finance.
D)business finance.

Question 52

Why did seats on the major exchanges decline in value in the late 1990s?

A)The decline in stock prices
B)The rise in interest rates
C)Competition from electronic trading
D)Increased government regulation

Question 53

Electronic communications networks (ECNs) are

A)stock-trading systems that rely on computer software to match buy and sell orders.
B)systems for communicating financial information to private investors over the Internet.
C)systems for private investors to communicate buy and sell orders to their brokers.
D)systems by which the government is able to monitor securities trades for possibly fraudulent activities.

Question 54

The relative illiquidity of corporate bonds is reflected in their having

A)higher prices than U.S. government securities.
B)smaller coupons than U.S. government securities.
C)higher bid-asked spreads than U.S. government securities.
D)more active secondary markets than U.S. government securities.

Question 55

Finance companies

A)take in deposits from savers and make loans to borrowers.
B)sell commercial paper and securities and make loans to borrowers with the funds.
C)take in deposits from savers and purchase assets with the funds.
D)bring together small savers and large borrowers.

Question 56

In what year did the mutual fund industry in the United States begin?

A)1812
B)1924
C)1974
D)1990

Question 57

What percentage of the mutual fund market is held by money market mutual funds?

A)1%
B)8%
C)23%
D)38%

Question 58

Closed-end mutual funds

A)will always redeem shares issued.
B)are not obligated to redeem shares issued.
C)issue shares that always sell at the market value of the underlying assets.
D)may not hold U.S. government securities in their portfolios.

Question 59

The portfolios that mutual funds offer to savers are

A)usually made up of bonds.
B)usually made up of common stocks.
C)tax free in most states.
D)usually more liquid than the underlying assets.

Question 60

Money market mutual funds

A)hold portfolios of stocks.
B)hold portfolios of short-term assets.
C)are always load funds.
D)hold only U.S. Treasury securities.

Question 61

The law of large numbers allows insurance companies to

A)hold capital market instruments as assets without fearing overly large numbers of defaults.
B)hold money market instruments as assets without fearing overly large numbers of defaults.
C)predict the average number of occurrences of insurable events in a large population of policyholders.
D)charge higher premiums than necessary, knowing that large numbers of individuals will pay them.

Question 62

In which of the following have pension funds invested the most?

A)Corporate equities and mutual fund shares
B)Government securities
C)Corporate bonds
D)Mortgages

Question 63

A defined benefits plan

A)is always fully funded.
B)may be underfunded but cannot be overfunded.
C)may be overfunded but cannot be underfunded.
D)may be either underfunded or overfunded.

Question 64

An insurance premium is a

A)payment made by an insurance company to a policyholder after the occurrence of an insurable event.
B)payment made by an insurance company to a policyholder following a period in which the policyholder has filed no claims against the company.
C)fee paid by policyholders to insurance companies as payment for coverage.
D)fee paid by policyholders to insurance companies in exchange for special considerations, such as a particularly large policy.

Question 65

To deal with difficulties in administering pension funds, Congress in 1974 passed the

A)Corrupt Pension Fund Reform Act.
B)Securities and Exchange Act.
C)Employee Retirement Income Security Act.
D)Social Security Act.

Question 66

Vesting refers to

A)the right of the holder of an insurance policy to collect for an insurable event.
B)the shielding of returns on whole life policies from taxation.
C)the length of service required of an employee before he or she is eligible for a pension.
D)the payments made by an employee into a pension plan.

Question 67

In a defined contribution pension plan,

A)pension income varies depending on how well the plan's investments have done.
B)the employee is promised an assigned benefit based on earnings and years of service.
C)if the funds in the pension plan exceed the amount promised, the excess accrues to the issuing firm or institution.
D)all earnings are taxable as regular income.

Question 68

Term life insurance

A)is offered only by mutual insurance companies.
B)may be converted into an annuity when the policyholder reaches retirement age.
C)pays off only at the death of the policyholder.
D)receives favorable tax treatment from the U.S. government.

Question 69

Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of

A)moral hazard.
B)the drug abuse problems currently plaguing the country.
C)adverse selection.
D)failure of policyholders to keep paying their premiums.

Question 70

Sales finance companies

A)purchase accounts receivable of small firms at a discount.
B)sell commercial paper and buy long-term corporate bonds.
C)take in deposits from savers and buy corporate commercial paper.
D)are affiliated with companies which manufacture or sell goods.

Question 71

The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of

A)moral hazard.
B)adverse selection.
C)failure of policyholders to keep paying their premiums.
D)excessive government regulation.

Question 72

Property and casualty insurers hold

A)more short-term assets than do life insurance companies.
B)fewer short-term assets than do life insurance companies.
C)roughly the same amount of short-term assets as do life insurance companies.
D)only long-term assets.

Question 73

What do many analysts see finance companies as having an advantage in?

A)In purchasing commercial paper
B)In selling long-term securities
C)In monitoring the value of collateral
D)In charging consumers particularly low interest rates

Question 74

Property and casualty insurance companies hold more liquid assets than do life insurance companies because

A)they face greater adverse selection problems.
B)they face greater moral hazard problems.
C)events such as fires and earthquakes are difficult to predict.
D)they are required to do so by law.

Question 75

What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?

A)401(k) plans
B)Social Security plans
C)Early retirement plans
D)486(b) plans

Question 76

Which of the following is true of mutual insurance companies?

A)Most life insurance companies are mutual insurance companies.
B)The largest life insurance companies are mutual insurance companies.
C)They are owned by their shareholders.
D)They only grant group policies to large corporations.

Question 77

Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of

A)moral hazard.
B)adverse selection.
C)drunk driving.
D)failure of policyholders to keep paying their premiums.

Question 78

When an insurance company makes a direct loan to a firm, the loan is known as

A)a private placement.
B)a commercial paper.
C)an account receivable.
D)an account payable.

Question 79

Insurance companies

A)hold capital market instruments as assets and issue insurance promises as liabilities.
B)issue insurance promises as assets and hold capital market instruments as liabilities.
C)hold capital market instruments as assets and also issue insurance promises as assets.
D)hold capital market instruments as liabilities and also issue insurance promises as liabilities.

Question 80

The largest institutional participants in capital markets are

A)pension funds.
B)insurance companies.
C)consumer finance companies.
D)business finance companies.