Deck 13: Nonbank Finance

Question 1

Insurance companies reduce risk exposure in exchange for a portion of their insurance premiums by obtaining

A) government loan guarantees.
B) federal insurance.
C) reinsurance.
D) bankers acceptances.

Answer 1

reinsurance.

Question 2

Relative to life insurance companies, property and casualty insurance companies hold

A) more liquid assets.
B) more long-term government bonds.
C) more commercial mortgages.
D) fewer municipal bonds.

Answer 2

more liquid assets.

Question 3

The specialty of Lloyd's of London is

A) annuities.
B) hedge funds.
C) mutual funds.
D) reinsurance.

Answer 3

reinsurance.

Question 4

The regulatory agency responsible for regulating the activities of life insurance companies is

A) the FDIC.
B) the Fed.
C) the FHLBS.
D) the appropriate state agency where the company is operating.

Question 5

In recent years, bank regulatory authorities have

A) encouraged banks to enter the insurance field.
B) discouraged banks from entering the insurance field.
C) asked Congress to write new legislation that would make it illegal for banks to enter the insurance field.
D) asked Congress to write new legislation that would make it legal for banks to enter the insurance field.

Question 6

Life insurance companies are regulated by state governments because

A) they have never experienced bankruptcy.
B) they have never experienced profitability.
C) they have never experienced widespread failures.
D) they hold only highly liquid assets.

Question 7

Which of the following is true of life insurance companies?

A) Typically the type of assets that life insurance companies hold are corporate bonds, commercial mortgages, and corporate stock.
B) The two typical forms of life insurance polices that are held can be classified as whole and variable life policies.
C) The major risk that life insurance companies face is that payouts to policy holders are very hard to predict.
D) Life insurance companies have suffered from wide spread failures.

Question 8

An example of permanent insurance is ________ insurance, and an example of temporary insurance is ________ insurance.

A) term; variable life
B) whole life; variable life
C) whole life; term
D) term; whole life

Question 9

Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of

A) fraudulent claims.
B) moral hazard.
C) adverse selection.
D) pecuniary purchases.

Question 10

The insurance industry's share of total financial intermediary assets fell because of

A) poor investment returns in the 1960s and 1970s.
B) widespread failures of life insurance companies.
C) federal regulations limiting the sale of life insurance.
D) unpredictability of payouts.

Question 11

Property and casualty insurance companies hold the largest share of their assets in

A) long-term government bonds.
B) short-term government securities and commercial paper.
C) tax-exempt municipal bonds and U.S. government securities.
D) medium-term corporate bonds.

Question 12

Reinsurance allows ________ to reduce the risks of exposure by allocating a portion of the risk to ________ in exchange for a portion of the premium.

A) insurance companies; another insurance company
B) insurance companies; the insured
C) the insured; the insurance company
D) the insured; a bank

Question 13

When those most likely to produce the outcome insured against are the ones who purchase insurance, insurance companies are said to face the problem of

A) fraudulent claims.
B) moral hazard.
C) adverse selection.
D) pecuniary purchases.

Question 14

In response to banks entering into the insurance business, insurance companies have started to supply ________ insurance.

A) debt
B) credit
C) equity
D) currency

Question 15

Property and casualty insurance companies are organized

A) both as stock and mutual companies.
B) only as stock companies.
C) only as mutual companies.
D) primarily as cooperatives.

Question 16

The type of credit insurance that landed AIG into trouble in 2008 is called

A) insurance rate swaps.
B) monoline insurance.
C) default insurance.
D) credit default swaps.

Question 17

Only ________ can issue monoline insurance policies.

A) life insurance companies
B) insurance companies that issue multiple types of insurance
C) property insurance companies
D) insurance companies that specialize in credit insurance alone

Question 18

A Supreme Court ruling in March 1996 held that

A) state laws to prevent banks from selling insurance can be superseded by federal rulings from banking regulators that allow banks to sell insurance.
B) state laws to prevent banks from selling insurance cannot be superseded by federal rulings from banking regulators that allow banks to sell insurance.
C) state laws to prevent banks from selling insurance can be superseded only if Congress enacts legislation that allow banks to sell insurance.
D) state laws to prevent banks from selling insurance cannot be superseded by federal legislation.

Question 19

A contract requiring payment of an annual premium in exchange for the payment of a future stream of payments beginning at a specified age and continuing until death is

A) whole life insurance.
B) an annuity.
C) term life insurance.
D) variable life insurance.
E) universal life insurance.

Question 20

The key factor causing life insurance companies to move into the management of pension funds was

A) the investment expertise of insurance companies.
B) a request for this change by managers of pension funds.
C) a change in state laws.
D) a change in federal legislation.

Question 21

Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide is an example of a

A) restrictive provision.
B) restrictive covenant.
C) anti-fraud exclusion.
D) risk-based deductible.

Question 22

Privatization of Social Security involves

A) tax reductions.
B) benefit reductions.
C) increasing the retirement age.
D) investing portions of the trust fund in corporate securities.

Question 23

The government corporation that insures pension benefits is

A) Fannie Mae.
B) Ginnie Mae.
C) Penny Benny.
D) Sallie Mae.

Question 24

Vesting refers to

A) the length of time an insurance company has been in business.
B) the length of time that a person must be enrolled in a pension plan before being entitled to receive benefits.
C) the length of time until a CD matures.
D) the premium required under term insurance.

Question 25

Coinsurance reduces moral hazard in exactly the same way as

A) limits on insurance.
B) risk-based premiums.
C) deductibles.
D) restrictive provisions.

Question 26

Charging risk-based insurance premiums is a time-honored principle of insurance management to reduce

A) moral hazard.
B) adverse selection.
C) free riding.
D) principal-agent problems.

Question 27

In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff.

A) moral hazard
B) opportunism
C) adverse selection
D) shirking

Question 28

If a pension fund has insufficient contributions and earnings to pay benefits, it is said it be

A) underfunded.
B) at par.
C) fully funded.
D) under par.

Question 29

Explain the problems that necessitate insurance management, and three methods insurance companies use to address these problems. Identify the problem that each practice addresses.

Question 30

A defined-benefit pension

A) determines benefits by contributions and their earnings.
B) fixes benefits in advance.
C) links benefits to investment performance.
D) fixes benefits paid out for a limited number of years.

Question 31

In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.

A) moral hazard; insurance market discrimination
B) moral hazard; insurance segregation
C) moral hazard; adverse selection
D) adverse selection; moral hazard

Question 32

The Pension Benefit Guarantee Corporation performs a role similar to that of

A) the Federal Reserve System.
B) the Comptroller of the Currency.
C) the FDIC.
D) the Office of Thrift Supervision.

Question 33

Which of the following insurance practices attempts to minimize the adverse selection problem insurance companies face?

A) Prevention of fraud.
B) Risk-based premiums.
C) Restrictive provisions.
D) Deductibles.

Question 34

The higher the insurance coverage, the ________ the policyholder can gain from risky activities that make an insurance payoff ________ likely.

A) more; less
B) more; more
C) less; less
D) less; more

Question 35

Adverse selection occurs when those ________ likely to get ________ insurance payoffs are the ones who want to purchase insurance the most.

A) least; large
B) least; small
C) most; large
D) most; small

Question 36

Fraudulent practices and other abuses of private pension funds led Congress to enact the

A) FDIC Act.
B) Federal Reserve Act.
C) FHLBS.
D) Employee Retirement Income Security Act.

Question 37

If a pension fund has sufficient contributions and earnings to pay benefits, it is said to be

A) underfunded.
B) at par.
C) fully funded.
D) over par.

Question 38

A deductible reduces ________ in exactly the same way as ________.

A) moral hazard; coinsurance
B) adverse selection; restrictive provisions
C) moral hazard; cancellation of insurance
D) adverse selection; limits on the amount of insurance

Question 39

Of the following financial intermediaries, which holds the least liquid assets?

A) Property and casualty insurance companies
B) Life insurance companies
C) Money market mutual funds
D) Commercial banks

Question 40

Since Social Security benefits are paid from current contributions, the system is a

A) privatized system.
B) overfunded system.
C) "pay-as-you-go" system.
D) defined contribution system.

Question 41

In financial markets an IPO is an

A) investment portfolio option.
B) initial public offering.
C) initial portfolio offering.
D) investment portfolio offering.

Question 42

In financial markets, when a firm issuing new securities has previously issued securities, these securities are called

A) seasoned issues.
B) an initial public offering.
C) secondary issues.
D) investment-grade issues.

Question 43

The federal agency that ensures that potential security purchasers are well informed is the

A) FCC.
B) FTC.
C) NRC.
D) SEC.

Question 44

IPOs have become very important in the U.S. economy because they are a major source of financing for

A) so-called "blue-chip" companies.
B) hedge funds.
C) internet companies.
D) mutual funds.

Question 45

Brokers, in contrast to security dealers,

A) hold inventories of securities.
B) make their income through commissions.
C) make their living on the spread between the bid price and the asked price.
D) buy and sell securities at given prices.

Question 46

Privatization of the Social Security system is being considered due to

A) the desire to reduce taxes.
B) demands to reduce the retirement age.
C) reduced life expectancy.
D) underfunding of the system.

Question 47

Compared to commercial banks and thrift institutions, finance companies are

A) heavily regulated.
B) able to attract small depositors.
C) prevented from making relatively small loans.
D) virtually unregulated.

Question 48

The General Motors Acceptance Company (GMAC) is a

A) sales finance company.
B) consumer finance company.
C) business finance company.
D) public finance company.

Question 49

In financial markets, when a firm issues stock for the first time it is called an

A) investment portfolio option.
B) initial public offering.
C) initial portfolio offering.
D) investment portfolio offering.

Question 50

When a corporation wishes to sell new securities, it usually employs

A) a takeover specialist.
B) a finance company.
C) an investment bank.
D) a commercial bank.

Question 51

The practice of factoring involves

A) the syndication of underwriting large security issues.
B) the selling of accounts receivable at a discount in return for cash.
C) breaking up large mutual funds into smaller funds.
D) spreading the risk of insurance through reinsurance.

Question 52

Social Security is a

A) fully funded pension plan.
B) federally insured private pension plan.
C) government sponsored private pension plan.
D) "pay-as-you-go" system.

Question 53

Loans made to consumers by finance companies are typically

A) only for the purchase of cars or boats.
B) at interest rates below those charged by banks for the same type of loan.
C) at interest rates above those charged by banks for the same type of loan.
D) not made for less than $10,000.

Question 54

A person remodeling her house could obtain a loan from a

A) sales finance company.
B) consumer finance company.
C) business finance company.
D) public finance company.

Question 55

Explain why the Social Security system faces problems. Discuss the possible solutions to these problems.

Question 56

Keough plans and IRAs are

A) individual pension plans.
B) government pension plans.
C) corporate pension plans.
D) public pension plans.

Question 57

________ assume the risk of issuing a new stock in the hope of earning profits on its sale.

A) Stock brokers
B) Securities dealers
C) Underwriters
D) Stock speculators
E) Reinsurers

Question 58

________ assist in the initial sale of securities in the primary market; ________ assist in the trading of securities in the secondary markets.

A) Investment banks; mutual funds
B) Commercial banks; mutual funds
C) Investment banks; securities brokers and dealers
D) Commercial banks; securities brokers and dealers

Question 59

Investment banks purchase new security issues in the hope of making a profit. This is the act of

A) reinsuring.
B) factoring.
C) syndicating.
D) underwriting.

Question 60

Allowing individuals to manage a portion of their Social Security funds is

A) socialization.
B) privatization.
C) democratization.
D) regeneration.

Question 61

Before 1970, mutual funds invested almost solely in

A) corporate bonds.
B) corporate common stocks.
C) United States government bonds.
D) municipal bonds and money market securities.

Question 62

A type of investment fund that makes long-term investments in companies that are not publicly traded is called a

A) private equity fund.
B) hedge fund.
C) sovereign wealth fund.
D) brokerage fund.

Question 63

Which of the following was the fastest-growing financial intermediary of the 1970s?

A) Commercial banks
B) Credit unions
C) Finance companies
D) Money market mutual funds

Question 64

Several features distinguish hedge funds from traditional mutual funds, including:

A) Mutual funds have a minimum investment requirement of $1,000 or more; hedge funds have no minimum investment requirement.
B) Hedge funds typically charge investors large fees relative to mutual funds.
C) Hedge fund investors need not commit their money for more than a few weeks at a time, explaining why they pay higher fees.
D) Hedge funds are significantly less risky relative to mutual funds.

Question 65

Mutual funds are primarily held by

A) financial institutions.
B) households.
C) nonfinancial businesses.
D) the Social Security trust fund.

Question 66

Which of the following did not contribute to the failing of Freddie Mac and Freddie Mae?

A) Problems with adverse selection.
B) Problems with moral hazard.
C) Weak regulatory oversight.
D) Unethical accounting practices.

Question 67

Which of the following is NOT an advantage of private equity funds?

A) Private companies are not subject to the same regulations as a publicly traded company.
B) Managers of private firms are not under the same level of pressure to produce high returns compared to the managers of publically traded firms.
C) Private equity firms can do a better job in controlling the problems created by moral hazard.
D) Private equity funds give managers of the companies higher stakes compared to managers in publically traded companies.

Question 68

Mutual funds in which a fixed number of nonredeemable shares are sold at an initial offering and are then traded in the over-the-counter market, like shares of common stock, are called

A) open-end funds.
B) close-end funds.
C) OTC funds.
D) primary-issue funds.

Question 69

An innovation that blurred the distinction between brokerage firms and commercial banks was Merrill Lynch's development in 1977 of the

A) cash management account.
B) money market mutual fund.
C) individual retirement account.
D) discount brokerage.

Question 70

Which of the following is NOT a government-sponsored enterprise?

A) Fannie Mae.
B) Freddie Mac.
C) Federal Home Loan Banks.
D) Ginnie Mae.

Question 71

Most mutual funds are

A) no-load funds.
B) load funds.
C) large-load funds.
D) small-load funds.

Question 72

Mutual funds that allow shares to be redeemed at any time at a price that is tied to the asset value of the fund are known as

A) close-end funds.
B) open-end funds.
C) asset-value funds.
D) redeemable funds.

Question 73

Of the three agencies that have been created to promote residential housing, the only one that is an entity of the U.S. government is

A) Fannie Mae.
B) Ginnie Mae.
C) Freddie Mac.
D) Sallie Mae.

Question 74

A ________ makes investment in established businesses which are publically traded and takes them private.

A) sovereign wealth fund
B) capital buyout fund
C) hedge fund
D) venture capital fund

Question 75

Explain the factors that account for the large increase in market share experienced by mutual funds since 1980.

Question 76

Long-Term Capital got into trouble when it thought that the spread between prices on long-term Treasury bonds and long-term corporate bonds was too ________, and bet that this "anomaly" would disappear and the spread would ________.

A) high; narrow
B) low; widen
C) low; narrow
D) high; widen

Question 77

A sales commission is charged for the purchase of

A) no-load mutual funds.
B) load mutual funds.
C) sinking mutual funds.
D) syndicated funds.

Question 78

Elimination of minimum brokerage commission rates occurred because of

A) competition from banks.
B) demands of institution investors.
C) competition from foreign brokerage firms.
D) an action of the Securities and Exchange Commission.

Question 79

A ________ makes investments in new start-up businesses.

A) capital buyout fund
B) sovereign wealth fund
C) venture capital fund
D) hedge fund