Question 1

If an insurer contracts with other insurance companies to share some of the risks of insurance underwriting in return for a share of some of the first insurer's premium income this is known as:

Accepted Answer

Reinsurance is the practice where an insurer (the ceding company) arranges to transfer part of its risk portfolios to other parties (reinsurers) to reduce the likelihood of paying a large obligation resulting from an insurance claim. This process allows the original insurer to take on more risk because it knows that part of that risk is covered by the reinsurers.

Question 2

Conglomerate financial institutions:

Accepted Answer

Conglomerate financial institutions have not always proven to be cost effective due to complexities and inefficiencies in managing diverse operations.

Question 3

Mortgage banks:

Accepted Answer

Mortgage banks primarily focus on originating, selling, and servicing mortgage loans. They typically do not hold the mortgages in their own portfolio, allowing them to free up capital to originate more loans.

Question 4

Real Estate Investment Trusts (REITs):

Accepted Answer

REITs invest in a diversified pool of real estate properties and loans, allowing investors to earn a share of the income produced through commercial real estate ownership without having to buy, manage, or finance any properties themselves.

Question 5

Which of the following is not a trend affecting financial institutions today?

Accepted Answer

Financial institutions are actually expanding the number of services they offer to meet diverse customer needs and generate new revenue streams, not reducing them.

Question 6

Which recent ruling listed below requires businesses to report the unfunded portion of pension benefits as a liability?

Accepted Answer

SFAS 87, issued by the Financial Accounting Standards Board (FASB), requires businesses to report the unfunded portion of their pension benefits as a liability on their financial statements. This standard aims to provide more transparency regarding a company's pension obligations.

Question 7

An investment fund which purchases securities from firms in trouble in the hope of scoring exceptional returns should these firms recover or when their more valuable assets are liquidated is called a:

Accepted Answer

Vulture funds specialize in buying securities from distressed firms at a significant discount, aiming to profit from their recovery or the liquidation of their assets.

Question 8

The net asset value (NAV) of a mutual fund refers to:

Accepted Answer

The net asset value (NAV) of a mutual fund is essentially the fund's price per share. It is calculated by dividing the total value of all the securities in the portfolio, minus any liabilities, by the number of shares outstanding.

Question 9

A recent, growing trend among mutual life insurance companies is:

Accepted Answer

Mutual life insurance companies have been increasingly converting to stock companies, a process known as demutualization. This allows them to access capital markets more easily and provides more flexibility in their operations.

Question 10

An example of property/casualty insurance is:

Accepted Answer

All the options listed (A: Medical malpractice, B: Homeowner's insurance, C: Worker's compensation) are examples of property/casualty insurance, which covers damage to property and/or liability for causing injuries or damage to others.

Question 11

Property/Casualty IS grouped by whether they are agency companies or direct writers. Direct writers sell directly to the public via:

Accepted Answer

Direct writers sell insurance directly to the public through various channels, including the telephone, television, and the Internet, bypassing traditional insurance agents or brokers.

Question 12

What measures of a financial institution's performance are the most widely used?

Accepted Answer

All of the options listed (A through D) are widely used measures of a financial institution's performance. They encompass various aspects of performance, including market valuation, profitability, risk exposure, and operational efficiency, providing a comprehensive view of the institution's health and effectiveness.

Question 13

Which of the following is not a new form of consumer-oriented finance company that has emerged recently?

Accepted Answer

Venture capital firms are not a new form of consumer-oriented finance company; they have been around for a long time and primarily focus on investing in startups and small businesses rather than providing consumer financial services.

Question 14

The 1999 Financial Services Modernization (Gramm-Leach-Bliley) Act has aided the trend of ____ by permitting banks, insurers and securities firms (as well as selected other financial firms) to reach across industry boundaries and link up with each other.

Accepted Answer

The 1999 Financial Services Modernization (Gramm-Leach-Bliley) Act allowed banks, insurers, and securities firms to merge and offer each other's services, leading to a convergence of financial services across traditional industry boundaries.

Question 15

Recently, one of the most rapidly growing investment companies (which is also gradually replacing traditional pension plans) is:

Accepted Answer

Lifecycle funds, also known as target-date funds, have been growing rapidly as an investment option, particularly in retirement planning. They automatically adjust the asset mix according to a selected time frame that is usually linked to the investor's expected retirement date, making them an increasingly popular choice for replacing traditional pension plans.

Question 16

The passage of the Pension Protection Act of 2006 encourages businesses to set up employee pension programs and has stimulated the growth of:

Accepted Answer

The Pension Protection Act of 2006 has particularly encouraged the growth of lifecycle funds, which automatically adjust the mix of assets as an individual gets closer to retirement age, making them a popular choice for pension plans.

Question 17

Hedge funds often ask for minimal investments of at least:

Accepted Answer

Hedge funds typically require investors to commit a substantial amount of money, often ranging from one to several million dollars, making them accessible primarily to high-net-worth individuals and institutional investors.

Question 18

Hedge funds are investment companies that are:

Accepted Answer

Hedge funds are largely unregulated, allowing them more flexibility in their investment strategies compared to mutual funds and other investment vehicles.

Question 19

Recent trends of pursuing smaller investors and more aggressive management of hedge funds has led to:

Accepted Answer

Recent trends in hedge fund management, including targeting smaller investors and adopting more aggressive strategies, have raised concerns about the potential risks and impacts on market stability. This has led to calls for more regulation of the industry to protect investors and ensure the integrity of financial markets.

Question 20

One of the most prominent changes in mutual funds is greater use of derivatives, including:

Accepted Answer

Derivatives such as financial futures, options, and credit and interest rate swap contracts are increasingly used by mutual funds to manage risk, hedge positions, and enhance returns, making "All of the above" the correct choice.

Quiz 16: Exploring Various Aspects of Pension Funds, Finance Companies, and Insurance Industry