Question 1

Which of the following is not true regarding defined contribution pension plans?&#10;A) Employees make regular contributions to the plan.&#10;B) Employers make regular contributions to the plan.&#10;C) The employer bears all of the investment risk.&#10;D) Benefits are directly related to the earnings of the funds investments.&#10;E) The number of defined contribution plans is increasing.

Accepted Answer

In defined contribution pension plans, the investment risk is borne by the employee, not the employer. Therefore, choice C is not true. Choices A, B, D, and E are all true, as employees and employers both contribute to the plan, benefits are directly related to the funds' investments, and the number of defined contribution plans is increasing.

Question 2

Banks have high liquidity needs and therefore,have a short time horizon.

Accepted Answer

Banks need high liquidity to meet the demands of their customers, including those who make deposits and withdrawals on a daily basis. This means that banks typically have a short time horizon and need to be able to access liquid funds quickly in order to meet their obligations.

Question 3

____ are investment specialists that are responsible for managing the investments of others.There are often legal standards against which they must abide in the performance of their duties.&#10;A) Underwriters&#10;B) Investments bankers&#10;C) Fiduciaries&#10;D) Account executives&#10;E) Trust officers

Accepted Answer

Fiduciaries are investment specialists who have a legal responsibility to act in the best interests of their clients, often referred to as a "fiduciary duty." They must manage investments in a trustworthy manner, placing the needs of their clients above their own interests. Other options listed, such as underwriters, investment bankers, account executives, and trust officers, may also deal with investments, but do not necessarily have the same legal obligation to act solely in the client's best interest.

Question 4

The retirement plan that promises to pay a specific benefit to its beneficiaries is&#10;A) A defined contribution plan.&#10;B) A defined benefit pension plan.&#10;C) A non-contribution pension plan.&#10;D) An actuarial pension plan.&#10;E) Supplemental Retirement Account (SRA).

Accepted Answer

A defined benefit pension plan is the retirement plan that promises to pay a specific benefit to its beneficiaries, usually based on a formula that takes into account the employee’s years of service and salary history. In contrast, a defined contribution plan only specifies the amount that an employer or employee will contribute to the plan, with no guarantee of the final benefit amount. The other options (C, D, and E) are not recognized types of retirement plans.

Question 5

In a defined contribution pension plan,&#10;A) The plan does not promise to pay the retiree a specific income stream after retirement.&#10;B) The plan does promise to pay the retiree a specific income stream after retirement.&#10;C) The employee's retirement income is not an obligation of the firm.&#10;D) The company carries the risk of paying future pension benefits to retirees.&#10;E) Choices a and c

Accepted Answer

In a defined contribution pension plan, the plan does not promise a specific income stream after retirement, and the employee's retirement income is not an obligation of the firm.

Question 6

Endowment funds&#10;A) Are formed from the contributions to charitable and educational institutions.&#10;B) Are attractive investments for individuals with low liquidity needs.&#10;C) Usually have very short investment horizons.&#10;D) Provide retirement benefits for public employees.&#10;E) Provide death benefits for its contributor's survivors.

Accepted Answer

Endowment funds are formed from contributions to charitable and educational institutions for the purpose of providing long-term financial support for the organizations' missions. They are not meant to serve as retirement benefits or death benefits for individuals. Additionally, endowment funds typically have long investment horizons to ensure sustained growth for the organizations they support.

Question 7

Which of the following statements concerning defined benefit plans is false?&#10;A) The company bears the risk of investments&#10;B) Employees are entitled to either a lump-sum payment or income stream at retirement&#10;C) Risk tolerance depends on funding status and its actuarial rate&#10;D) Defined benefit plans for young workers are typically more conservatively invested than defined contribution plans&#10;E) All of the above are true statements

Accepted Answer

Defined benefit plans for young workers are typically more aggressively invested than defined contribution plans, as the company bears the investment risk and aims to maximize returns for the benefit of the plan's participants.

Question 8

Banks must compete for funds (savings deposits,CD's,etc.)in order to make loans and other types of investments.

Accepted Answer

Banks need funds in order to make loans and investments, and they compete with each other for these funds through various marketing and advertising strategies. Banks also offer different interest rates and incentives to attract deposits from customers.

Question 9

Cash flows for nonlife insurance companies,such as property and casualty,are similar to cash flows of life insurance companies.

Accepted Answer

Cash flows for nonlife insurance companies, such as property and casualty, are not similar to cash flows of life insurance companies. Nonlife insurance companies typically earn their income from premiums paid by policyholders, and their expenses primarily come from claim payments and administrative costs. Life insurance companies, on the other hand, typically earn income from premiums and investment income, and their expenses come from claims and administrative costs as well as policy payouts upon a person's death or expiration of their policy. These differences in revenue sources and expense types lead to different cash flow patterns for nonlife vs. life insurance companies.

Question 10

Defined contribution pension plans promise to pay retirees a specific income stream after retirement.

Accepted Answer

Defined contribution pension plans do not promise a specific income stream; instead, they depend on the contributions made and the investment performance of those contributions.

Question 11

Banks typically have short-term investment horizons because&#10;A) They have a strong need for liquidity.&#10;B) They offer short-term deposit accounts.&#10;C) They are required to by federal and state laws.&#10;D) Choices a and b&#10;E) All of the above

Accepted Answer

The answer of Banks typically have short-term investment horizons because&#10;A)...

Question 12

Many endowments are tax-exempt.

Accepted Answer

The answer of Many endowments are tax-exempt....

Question 13

Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced with different investment constraints than life insurance companies.

Accepted Answer

The answer of Non-life insurance companies have somewhat unpredictable cash...

Question 14

Banks typically&#10;A) Have low liquidity needs.&#10;B) Face very few federal and state regulatory constraints.&#10;C) Don't have to compete for funds.&#10;D) Have high liquidity needs and a short time horizons constraint.&#10;E) Low investment risk.

Accepted Answer

The answer of Banks typically&#10;A) Have low liquidity needs.&#10;B) Face...

Question 15

Banks face regulatory constraints at both the state and federal level.

Accepted Answer

The answer of Banks face regulatory constraints at both the...

Deck 27: Investment and Retirement Plans