Question 1

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

Accepted Answer

In a defined contribution pension plan, the plan does not promise to pay the retiree a specific income stream after retirement, which is choice A. Additionally, the employee's retirement income is not an obligation of the firm, which is choice C. Therefore, the best answer is E - choices A and C.

Question 2

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

Accepted Answer

Endowment funds are formed from the contributions made to charitable and educational institutions. These funds are invested to generate income to support the organization's activities and programs for the long term. It is not an investment for individuals with low liquidity needs, provides retirement benefits for public employees, or death benefits for its contributors' survivors.

Question 3

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

Accepted Answer

Banks are subject to regulatory constraints from both state and federal authorities, including agencies such as the Federal Reserve, FDIC, and state banking departments. These regulations often cover areas such as capitalization, lending practices, and consumer protection.

Question 4

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, differ from those of life insurance companies. Nonlife insurers receive premium payments up front and pay out claims as they arise, whereas life insurers receive premium payments over time and make payouts upon the death or maturity of the policy. Therefore, the timing and nature of cash flows differ between the two types of insurers.

Question 5

Many endowments are tax-exempt.

Accepted Answer

Endowments are usually tax-exempt entities as they are created to support a charitable, educational or religious purpose. Therefore, they are not subject to federal, state or local taxes on the income earned from their investments.

Question 6

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

Accepted Answer

Banks need to maintain high levels of liquidity to meet the demands of their depositors and other obligations. This means that they have a short time horizon and may need to access their liquid assets quickly.

Question 7

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

Accepted Answer

Banks have a strong need for liquidity as they have to meet the cash demand of customers for withdrawals and other transactions. They also offer short-term deposit accounts which give customers the flexibility to withdraw their money on short notice. Therefore, banks have short-term investment horizons to ensure that they have enough liquidity to meet their obligations to their customers. Additionally, while there are laws and regulations regarding the investments that banks can make, they do not necessarily require banks to have short-term investment horizons.

Question 8

The retirement plan that promises to pay a specific benefit to its beneficiaries is
A) A defined contribution plan.
B) A defined benefit pension plan.
C) A non-contribution pension plan.
D) An actuarial pension plan.
E) Choices a and c.

Accepted Answer

A defined benefit pension plan is the retirement plan that promises to pay a specific benefit to its beneficiaries, usually based on factors such as years of employment, salary history, and age. The employer bears the responsibility for funding the plan and assumes the investment risk for ensuring that there are sufficient funds to meet the plan's obligations.

Question 9

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

Accepted Answer

Defined contribution pension plans do not guarantee a specified benefit upon retirement, as the benefits are directly related to the earnings of the plan's investments. Thus, the investment risk is borne by the employee and not the employer.

Question 10

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

Accepted Answer

Banks need to attract funds from depositors in order to have money available to lend out to borrowers or use for other types of investments. This is a key aspect of their business model.

Question 11

_________ 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.
A) Underwriters
B) Investments bankers
C) Fiduciaries
D) Account executives
E) Trust officers

Accepted Answer

Fiduciaries are investment specialists who are legally bound to act in the best interests of their clients and manage their investments accordingly. They are held to high standards of care and must avoid any conflicts of interest that could compromise their clients' investments. Underwriters, investment bankers, account executives, and trust officers may also be involved in managing investments, but they do not necessarily have the same level of legal responsibility and fiduciary duty as fiduciaries.

Question 12

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

Accepted Answer

Banks have high liquidity needs due to the demand for withdrawals and other obligations. They also face a short time horizon constraint because they need to be able to meet these obligations quickly.

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

Non-life insurance companies often have to pay out claims that are more difficult to predict than the regular premium payments received by life insurance companies. This can result in more unpredictable cash outflows and therefore different investment constraints.

Quiz 23: Appendix: Objectives and Constraints of Institutional Investors

In a defined contribution pension plan,

Endowment funds

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

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

Many endowments are tax-exempt.

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

Banks typically have short-term investment horizons because

The retirement plan that promises to pay a specific benefit to its beneficiaries is

Which of the following is not true regarding defined contribution pension plans?

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

_________ 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.

Banks typically

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