BUSI 321 Quiz 4 Bank Performance, Thrifts, Finance Companies, and Investments solutions answers

BUSI 321 Quiz 4 Bank Performance, Thrifts, Finance Companies, and Investments solutions complete answers

 

The maximum insurance per depositor provided by the National Credit Union Share Insurance Fund is

 

Based on the market value of total assets, which is the dominant type of mutual fund?

 

The sum of net interest income, noninterest income, and securities gains, minus the provision for loan losses and noninterest expenses equals

 

A bank’s ROA ____ account for taxes on earnings. A bank’s ROE ____ account for taxes on earnings.

 

Which of the following factors affecting a bank’s gross interest income is not influenced by the bank’s policy decisions?

 

Interest paid on deposits and borrowed funds is called

 

Bank T generally obtains a high percentage of its funds from negotiable certificates of deposit (NCDs). Bank V obtains most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will likely incur the highest interest expense is ____.

 

A bank with ____ management may account for ____ loan losses, which _____ reported earnings now.

 

Fees charged by a bank on various services allow the bank to generate:

 

Gross interest expense is affected by

 

A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n)

 

Because credit unions ____ stock, they are technically owned by the ____.

 

To manage interest rate risk, a savings institution could use

 

The Financial Reform Act of 2010 did all of the following except:

 

If depositors move money from their checking accounts to short-term CDs, this would ____ the rate sensitivity of the savings institution’s liabilities to interest rate movements.

 

Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions ____ susceptible to unfriendly takeovers.

 

Savings institutions obtain most of their funds from

 

The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements.

 

A wholly owned subsidiary whose primary purpose is to finance sales of the parent company’s products and services, provide wholesale financing to distributors of the parent company’s products, and purchase receivables of the parent company is a

 

Finance companies can accumulate capital by doing all of the following except

 

The ________ is the federal agency responsible for regulating consumer finance products and services that may be offered by finance companies.

 

Finance companies are subject to

 

Finance companies commonly act as ____ for accounts receivable; that is, they purchase a firm’s receivables at a discount and are responsible for processing and collecting the balances of these accounts.

 

____ finance companies concentrate on purchasing credit contracts from retailers and dealers.

 

When a finance company purchases a firm’s receivables at a discount and becomes responsible for processing and collecting the balances of these accounts, it acts as a

 

If finance companies have liabilities that are more rate sensitive than their assets and want to reduce interest rate risk, they could

 

Mutual funds composed of bonds that offer periodic coupon payments are

 

Which of the following is not true regarding mutual funds?

 

Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations.

 

Hedge funds commonly use financial leverage, which can:

 

A mutual fund prospectus is not required to disclose the

 

Exchange-traded funds (ETFs)?

 

Most closed-end funds invest in

 

A bridge loan provided by a securities firm would most likely be made to

 

Asset stripping refers to

 

Competitive bidding by securities firms for underwriting the issue of new bonds is primarily used for

 

Securities firms serve as an intermediary for each of the following, except

 

When securities firms help corporations issue bonds, their primary role is as a(n)

 

Which of the following does not play a role in regulating securities trading?

 

Which of the following is not a way that a securities firm might advise a corporation to restructure its operations?

 

As a result of the Financial Services Modernization Act

 

_____ insurance provides a financial payout if specified employees of a business become disabled or 

 

Which type of life insurance policy does not build a cash value for policyholders?

 

____ insurance covers losses due to a contract not being fulfilled.

 

Which of the following is not a characteristic commonly assessed by insurance regulators to detect any problems in an insurance company?

 

Life insurance companies can attempt to reduce their exposure to interest rate risk by

 

The government agency that guarantees that participants in defined-benefit plans will receive their benefits upon retirement is the:

 

Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans.

 

A ____ plan allows a firm to know with certainty the amount of funds to contribute. The ____ plan allows a firm to know with certainty the amount of benefits that must be provided.

 

Pension funds managed by life insurance companies are normally referred to as

 

1.
 
A(n) ____ in interest rates could reduce a commercial bank’s expected cash flows because the interest paid on deposits may ____ than the interest earned on loans and investments.
 
2.
 
Even if other external forces (such as interest rates) are unchanged, a commercial bank’s expected cash flows can change in response to a change in its management skills.
 
3.
 
The risk premium on a commercial bank is ____ related to economic growth and ____related to management skills.
 
4.
 
Interest income generated from all assets is called
 
6.
 
Net interest income is the difference between gross interest income and interest expenses and is measured as a percentage of
 
8.
 
The loan loss provision as a percentage of assets should increase during periods of high economic growth.
 
9.
 
A bank’s net interest margin represents the proportion of its investments that are financed with borrowed funds.
 
10.
 
If a bank has shortterm deposits and provides longterm fixed rate loans, and interest rates decline over time, its net interest margin should be:
 
11.
 
For a given level of return on assets, a bank with a higher level of capital will have a lower
 
13.
 
When only equity counts as capital, the leverage measure is
 
16.
 
If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____.
 
17.
 
Return on assets (ROA) will usually reveal when a bank’s performance is not up to par, but it does not indicate the reason for poor performance.
 
19.
 
If a bank had longterm fixedrate assets and shortterm liabilities, and interest rates increased over time, its net interest margin should
 
20.
 
The sum of net interest income, noninterest income, and securities gains, minus provision for loan losses and noninterest expenses equals
 
21.
 
Which of the following banks would likely have the highest return on equity?
 
22.
 
Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A’s return on assets is ____ than Bank B’s. Bank A’s return on equity is ____than Bank B’s.
 
23.
 
Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital and Bank H holds a higher level of capital. Bank G’s return on equity is probably ____ volatile than that of Bank H. Bank G’s beta is probably ____ than that of Bank H.
 
24.
 
Bank K is conservatively managed. It benefits slightly when general economic conditions are very favorable and is hurt slightly when general economic conditions are very unfavorable. Its beta would likely be
 
25.
 
____ results from a bank’s sale of securities.
 
26.
 
Bank X obtains most of its funds from NCDs, while Bank Y obtains much of its funds from passbook savings and from demand deposit accounts. Given this information, the net interest margin of Bank X would likely be ____ than that of Bank Y, and noninterest expenses would likely be ____ than that of Bank Y.
 
27.
 
A bank’s ROE ____ account for its financial leverage. A bank’s ROA ____ account for its financial leverage.
 
29.
 
A bank’s ROA ____ account for loan losses. A bank’s ROE ____ account for loan losses.
 
31.
 
Banks with relatively ____ ROAs often incur ____ noninterest expenses.
 
33.
 
Which of the following is not a factor that affects cash flows of a commercial bank?
 
34.
 
The value of a commercial bank can be modeled as the present value of its future cash flows.
 
35.
 
The level of competition is an industry characteristic that will favorably affect cash flows, because a high level of competition may increase a bank’s volume of business or increase the prices it can charge for its services.
 
36.
 
If the risk premium on a commercial bank rises, so will the required rate of return by investors who invest in the bank.
 
37.
 
Gross interest expenses of banks are normally higher in periods when market interest rates are higher
 
38.
 
If banks continue to offer new services (such as insurance or securities services), their noninterest income will decrease over time.
 
39.
 
The loan loss provision should increase during periods when loan losses are more likely, such as during a recessionary period.
 
 
 
 
 
 
 
 

40.
 
Any individual bank’s ROA depends on the bank’s policy decisions, but not on uncontrollable factors relating to the economy and government regulations.
 
41.
 
Access to a bank’s ROA without any other information reveals when its performance is not up to par and the reasons for its poor performance.
 
42.
 
During the credit crisis, the level of ____ was much higher than in other periods.
 
43.
 
During periods of ____ economic growth, loan demand tends to be ____, allowing banks to provide ____ loans.
 
44.
 
Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.
 
45.
 
If a bank is too ____ in attempting to avoid loan losses, its net interest margin will be ____.
 
46.
 
Banks offering ____ nontraditional services will incur ____ noninterest expenses and ____ noninterest income.
 
47.
 
When interest rates fall, the rates that a bank pays on deposits typically decline less than the interest rates that the bank earns on its loans and investments.
 
48.
 
Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than the rates that larger banks charge on the loans they provide to large businesses.
 
50.
 
A bank’s return on assets (ROA) could be lower than desired because of all of thefollowing except:
 
 

 

3.
Banks G and Hare the same size and have similar operations. Bank G holds the minimum level of capital, and Bank H holds a higher level of capital. Bank G’s return on equity is probably volatile than that of Bank H. Bank G’s risk premium is probably than that of Bank H.
 
 
4.
A bank’s net interest margin includes
 
 
6.
A bank’s ROE_ account for it financial leverage. A bank’s ROA__ account for its financial leverage
 
 
11.
If a bank has long-term fixed-rate assets and short-term liabilities , and interest rates increase over time, its net interest margin should :
 
 
13.
If banks continue to offer new services, there non-interest income will decrease over time
 
 
15.
Interest income generated from all a banks assets is called
 
 
19.
Net income measured as a percentage of assets is
 
 
20.
Noninterest income is usually higher for small banks than for money center and large banks because small banks can charge higher rates on loans to small local businesses.
 
 
21.
Return on assets (ROA) will usually reveal when a bank’s performance is not up to par, but it does not indicate the reason for poor performance ,
 
 
25.
Which of the following banks would likely ha e the highest return on equity
 
 
 
 
 
 
 
 
 
 
 

 

1.
Bank K is conservatively managed. It benefits slightly when general economic conditions are very favorable and is hurt slightly when general economic conditions are very unfavorable. Its beta would likely be

A. less than zero.
B. zero.
C. between zero and 1.00.
D. greater than 1.00.
 
 
2.
Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital and Bank H holds a higher level of capital. Bank G’s return on equity is probably ____ volatile than that of Bank H. Bank G’s beta is probably ____ than that of Bank H.

A. less; lower
B. less; higher
C. more; higher
D. more; lower
 
 
13.
Gross interest income is affected by

A. market interest rates.
B. the composition of assets held by banks.
C. interest expenses.
D. non-interest expenses.
E. A and B
 
 
14.
If a bank has short-term deposits and provides long-term fixed rate loans, and interest rates decline over time, its net interest margin should be:

A. declining over time.
B. rising over time.
C. constant over time.
D. consistently negative.
 
 
 
 
 
 
 
 
 
 

19.
The net interest margin.

A. money center; high
B. money center; low
C. small; low
D. A and C
 
 
21.
The risk of a loss due to closing out a transaction is referred to as ____ risk.

A. Settlement
B. Credit
C. interest rate
D. exchange rate
E. none of the above
 
 
22.
The sum of net interest income, non-interest income, and securities gains, minus provision for loan losses and non-interest expenses equals

A. net interest margin.
B. gross interest margin.
C. net income.
D. income before taxes.
 
 
23.
When only equity counts as capital, the higher the capital ratio, the

A. lower the leverage measure.
B. lower the degree of financial leverage.
C. higher the leverage measure.
D. A and B
E. B and C
 
 
 

 

1.
According to your text, about ____ percent of credit unions are insured by the National Credit Union Share Insurance Fund.
 
 
2.
The ____ acts as a temporary lender to credit unions.
 
 
3.
Adjustable-rate mortgages ____ of rising interest rates on a typical savings institution’s spread. They ____ of declining interest rates on the spread.
 
 
4.
____ are non-profit organizations composed of members with a common bond.
 
 
5.
____ are not a main source of funds for savings institutions.
 
 
6.
____ are the primary asset of savings institutions.
 
 
7.
Because credit unions’ sources and uses of funds are generally interest rate ____, movements in interest revenues and interest expenses of credit unions are ____.
 
 
9.
Checkable accounts offered by credit unions are called
 
 
10.
Comparing credit unions with commercial banks and savings institutions
 
 
12.
Credit unions differ from savings institutions in that they use a ____ proportion of their funds for mortgages and are ____ institutions.
 
 
13.
Credit unions obtain most of their funds from
 
 
14.
Credit unions use the majority of their funds to
 
 
15.
Deposits at credit unions are called
 
 
16.
____ do not represent an asset of credit unions.
 
 
17.
During the credit crisis of 2008-2009:
 
 
18.
During the credit crisis of 2008-2009, savings institutions experienced all of the following except:
 
 
19.
Federal credit unions are regulated and supervised by the
 
 
20.
Federally-chartered savings institutions are regulated by the
 
 
21.
The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited
 
 
23.
If a savings institutions’ assets have considerably longer duration than its liabilities, it can reduce its exposure to interest rate risk by
 
 
24.
If credit union members have a particular affiliation with their employers and large layoffs occur, the credit union’s exposure to ____ risk may increase.
 
 
25.
If depositors move money from their checking account to short-term CDs, this would ____ the rate-sensitivity of the savings institution’s liabilities to interest rate movements.
 
 
26.
The insuring agency for savings institutions is the
 
 
27.
____ is not a main use of funds for savings institutions.
 
 
29.
The maximum insurance per depositor by the National Credit Union Insurance Fund is
 
 
30.
Money market deposit accounts (MMDAs) represent
 
 
31.
Most mortgages originated by savings institutions are for
 
 
32.
The National Credit Union Share Insurance Fund (NCUSIF) requires all
 
 
33.
The primary source of funds for credit unions is
 
 
34.
The primary use of credit union funds is
 
 
35.
____ risk is probably the least concern for savings institutions.
 
 
36.
The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk.
 
 
37.
A savings institution owned by its depositors is a ____ savings institution.
 
 
38.
Savings institutions ____ allowed to borrow funds in the federal funds market; savings institutions ____ allowed to borrow funds from the Federal Reserve.
 
 
39.
Savings institutions can obtain capital by:
 
 
40.
A savings institution’s cash flows are ____ related to interest rate movements.
 
 
41.
Savings institutions commonly ____ to reduce their risk.
 
 
42.
The ____ savings institutions hold the most assets in aggregate.
 
 
44.
Savings institutions that reduce their amount of ____ will best reduce their exposure to interest rate risk.
 
 
45.
Savings institutions use most of their funds for ____. Commercial banks use most of their funds for ____.
 
 
 
 
 
 
 
 
 
 
 

46.
Savings institutions were adversely affected by the credit crisis because of their exposure to ____.
 
 
47.
The sensitivity of cost of funds to interest rate movements has been
 
 
49.
Today, credit unions are regulated as to the
 
 
51.
To measure ____ risk, some savings institutions measure the duration of their respective assets and liabilities.
 
 
52.
To obtain short-term funds, savings institutions commonly borrow funds in the ____ market.
 
 
53.
When a savings institution uses interest rate swaps to hedge interest rate risk, it would likely exchange ____ outflows for ____ inflows.
 
 
54.
When savings institutions are unable to attract sufficient deposits, they can
 
 
55.
Which of the following is not a deposit source of funds for savings institutions?
 
 
56.
Which of the following is not an advantage of credit unions?
 
 
57.
Which of the following is not an asset of savings institutions?
 
 
58.
Which of the following is not an objective of a credit union?
 
 
59.
Which of the following statements is incorrect?
 
 
60.
Which of the following was not a major reason for the savings institution crisis in the late 1980s?
 
 
 
 
 
 
 
 
 

 

1.
Although commercial paper is available only for short-term financing, finance companies can continually roll over their issues to create a permanent source of funds

a. True
b. False
 
 
2.
Business finance companies focus on loans to very large businesses

a. True
b. False
 
 
3.
Consumer finance companies primarily focus on 

a. consumer loans
b. consumer advising
c. consumer regulation 
d. none of the above
 
 
4.
Consumer finance companies sometimes provide mortgage loans to individuals

a. True
b. False
 
 
5.
Finance companies are exempt from state regulations

a. True
b. False
 
 
6.
Finance companies are not subject to state regulations on intrastate business. 

a. True
b. False
 
 
7.
Finance companies are regulated by the states and are not subject to regulation by any agency of the federal government

a. True
b. False
 
 
12.
Finance companies differ from commercial banks, savings institutions, and credit unions in that they 

a. do not rely heavily on deposits as a source of funds.
b. focus on financing acquisitions by companies. 
c. focus on providing residential mortgages. 
d. use most of their funds to purchase stocks
 
 
13.
Finance companies participate in the ____ market to reduce interest rate risk

a. money
b. bond
c. options
d. swap
 
 
14.
Finance companies would prefer to increase their long-term debt when interest rates 

a. are relatively low and are expected to increase.
b. have increased
c. have been stable for several years
d. are projected to decrease
 
 
15.
A finance company’s cash flows are _____ related to changes in economic growth and may be ____ related to changes in the risk-free rate

a. positively; inversely
b. inversely; positively
c. inversely; inversely
d. positively; positively
 
 
18.
The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies. 

a. True
b. False
 
 
19.
Many consumer finance companies provide personal loans directly to individuals to finance purchases of large household items

a. True
b. False
 
 
 
 
 
 
 
 
 
 
 
 
 

20.
The most important risk for finance companies is ____ risk

a. settlement
b. accounting
c. credit
d. exchange rate
 
 
21.
Overall, the liquidity risk of finance companies is higher than that of other financial institutions

a. True
b. False
 
 
22.
Some finance companies offer credit card loans through a particular retailer

a. True
b. False
 
 
23.
Unlike loans made by commercial banks, loans made by finance companies cannot be securitized (bundled together and sold as securities to investors). 

a. True
b. False
 
 
24.
The value of a finance company can be modeled as the present value of its future cash flows

a. True
b. False
 
 
26.
When interest rates increase, finance companies tend to use more long-term debt to lock in their cost of funds over an extended period of time

a. True
b. False
 
 
27.
Which of the following is not a main source of funds for finance companies? 

a. bank loans
b. commercial paper issues
c. bonds
d. borrowing from the Federal Reserve
 
 
28.
Which of the following is not a use of finance company funds? 

a. consumer loans
b. business loans
c. commercial paper
d. real estate loans 
e. All of the above are uses of finance company funds
 
 
 
 
 
 
 
 
 

 

1.
According to SEC regulations, the majority of the members on a mutual fund’s board of directors must be
 
 
2.
A(n) ____ fund contains a sales charge.
 
 
3.
____ are beneficial for investors who want to invest in tax-exempt securities.
 
 
4.
____ are most likely to invest in mortgages.
 
 
5.
____ are most likely to invest in mortgages.
 
 
6.
____ are not exchange-traded funds.
 
 
7.
Because ____ real estate investment trusts essentially represent a fixed income portfolio, their market value will ____ as interest rates increase.
 
 
8.
Bond portfolios with some bonds rated below Baa by Moody’s or BBB by Standard and Poor’s, available for investors desiring high return and willing to incur high risk, are called ____ funds.
 
 
9.
The composition of asset allocation funds
 
 
10.
Equity real estate investment trusts invest
 
 
11.
Exchange-traded funds are like open-end funds in the sense that
 
 
12.
Exchange traded funds can be
 
 
13.
An expense ratio represents ____ divided by the fund’s ____.
 
 
14.
____ funds are open to investment from investors at any time.
 
 
15.
____ funds do not normally repurchase their shares from investors.
 
 
16.
____ funds focus on a group of companies sharing a particular characteristic.
 
 
17.
____ funds sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securities.
 
 
18.
Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as
 
 
20.
Hedge funds differ from open-end mutual funds in the sense that
 
 
21.
Hedge funds that exceed a specified size must register with the
 
 
22.
If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders.
 
 
23.
If interest rates are expected to ________, mortgage real investment trusts (REITs) ___________.
 
 
24.
If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called
 
 
25.
If money market funds definitely expect interest rates to increase, they will ____ their average asset maturity.
 
 
26.
An investor who believes that technology stocks will perform well but does not want to select individual technology stocks might invest in:
 
 
27.
The majority of mutual fund assets are in the form of
 
 
28.
Money market fund assets include all of the following, except
 
 
29.
Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.
 
 
30.
Money market funds commonly invest in
 
 
31.
Money market funds invest mostly in
 
 
33.
The most common investment by closed-end funds is in
 
 
34.
A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.
 
 
35.
A mutual fund prospectus does not contain
 
 
36.
A mutual fund prospectus does not contain the
 
 
37.
Mutual funds
 
 
38.
Mutual funds are not required to disclose which of the following in the prospectus?
 
 
40.
Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called
 
 
41.
Mutual funds that are composed of bonds that offer periodic coupon payments are called ____ mutual funds.
 
 
42.
Mutual funds that are willing to repurchase their shares from investors at any time are referred to as
 
 
43.
Mutual funds that include some non-U.S. stocks and U.S. stocks are called ____ funds.
 
 
45.
Mutual funds whose funds are promoted strictly by the mutual fund of concern are called
 
 
46.
Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.
 
 
47.
The net asset value of international stock mutual funds ____ as the dollar strengthens against foreign currencies. (Assume no change in the prices of foreign stocks.)
 
 
48.
No-load mutual funds are normally promoted by ____. Load funds are promoted by ____.
 
 
 
 
 
 
 
 
 
 
 

49.
The ____ of a mutual fund indicates the value per share.
 
 
50.
The ____ of a mutual fund represents the price at which shares can be purchased from a mutual fund.
 
 
51.
Shares of exchange-traded funds can be sold _________, and shares of open-end mutual funds can be sold _________.
 
 
52.
. The average annual fee on actively managed exchange-traded funds is ________, which is _________.
 
 
53.
To cover managerial expenses, mutual funds typically charge
 
 
54.
____ trade at one-tenth of the S&P 500 value.
 
 
55.
When interest rates decline, investors who want to earn a high return may tend to ____ in stock mutual funds, and ____ deposits in depository institutions.
 
 
56.
When the demand for a particular closed-end fund is ____, the fund is likely priced at a ____.
 
 
57.
When the redemptions of money market mutual fund shares exceeds sales of shares, the fund accommodates the amount of excessive redemptions by
 
 
58.
Which of the following is incorrect about money market funds (MMFs)?
 
 
59.
Which of the following is not a way in which mutual funds generate returns for their shareholders?
 
 
60.
Which of the following is not disclosed in the prospectus?
 
 
62.
Which of the following is not true with respect to venture capital funds?
 
 
 
 
 
 
 
 
 

 

1.
After a target firm is acquired, the acquirer may sell off divisions of the target that are not compatible with the
acquirer’s business. This process is known as
a. bridging.
b. asset stripping.
c. greenmail.
d. none of the above
 
 
2.
____ are not included in flotation costs
a. Issue costs
b. Fees paid to the underwriters
c. Taxes paid on income earned from the stock offering
d. Registration expenses
 
 
4.
The ____ can liquidate failing brokerage firms.
a. Securities and Exchange Commission
b. Financial Industry Regulatory Authority
c. Federal Reserve Board
d. Securities Investor Protection Corporation
 
 
5.
The compensation paid to securities firms for helping a firm raise funds is typically in the form of interest income.
a. True
b. False
 
 
7.
The ____ determines margin requirements on securities purchased.
a. Securities and Exchange Commission
b. Financial Industry Regulatory Authority
c. Federal Reserve Board
d. Securities Investor Protection Corporation
 
 
8.
During the credit crisis, many commercial banks were forced to convert to securities firms.
a. True
b. False
 
 
9.
During the credit crisis, some large securities firms were either acquired by commercial banks or converted into bank
holding companies.
a. True
b. False
 
 
10.
Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of
future financing.
a. True
b. False
 
 
11.
The Federal Reserve intervened to help securities firms during the credit crisis in order to reduce the potential adverse
effects of systemic risk.
a. True
b. False
 
 
12.
The Financial Reform Act created the Financial Stability Oversight Council, which is responsible for identifying risks
to financial stability in the United States.
a. True
b. False
 
 
13.
If securities firms are subject to systemic risk, this means that their main source of risk is a rise in interest rates, which may cause the value of their bond holdings to decline.
a. True
b. False
 
 
14.
In a ____ of stock, all of the shares issued may be held by a small number of institutional investors.
a. market placement
b. public placement
c. shelf placement
d. private placement
 
 
15.
Institutional investors that are willing to hold stock for only a very short period of time are prime candidates for
participating in a private placement
a. True
b. False
 
 
16.
____ is not a service that a securities firm provides in placing bonds.
a. Origination
b. Underwriting
c. Distribution
d. Advising
e. All of the above are services that securities firms provide in placing bonds
 
 
17.
The ____ is not involved in the regulation of the securities industry.
a. Deposit Insurance Fund
b. Financial Industry Regulatory Authority
c. Securities and Exchange Commission
d. Federal Reserve Board
e. All of the above are involved in the regulation of the securities industry.
 
 
18.
Many of the fees that securities firms charge for advising clients on a possible merger are typically dependent on
whether the merger takes place.
a. True
b. False
 
 
19.
The ____ offers insurance on cash and securities deposited at brokerage firms.
a. Federal Reserve
b. New York Stock Exchange
c. Securities Investor Protection Corporation (SIPC)
d. Securities and Exchange Commission (SEC)
 
 
20.
One of the main functions of securities firms is helping corporations and governments raise funds.
a. True
b. False
 
 
21.
One reason for the financial problems of securities firms during the credit crisis was that they used a high degree of
financial leverage.
a. True
b. False
 
 
 
 
 
 
 
 
 
 
 
 
 

22.
The price of newly issued stock should be ____ the market price of the firm’s outstanding stock.
a. about the same as
b. much more than
c. much less than
d. B or C, depending on the amount of stock to be issued
 
 
23.
Research indicates that securities firms tend to
a. overprice IPOs.
b. underprice IPOs.
c. price IPOs correctly.
d. none of the above
 
 
24.
The SEC’s Regulation Fair Disclosure (FD):
a. requires firms to disclose any significant information to the SEC before making public announcements.
b. requires firms to disclose any significant information to the Federal Reserve before releasing it to the public.
c. requires firms to disclose any significant information simultaneously to all market participants.
d. prohibits insiders at firms from trading on significant inside information.
 
 
25.
The Securities and Exchange Commission’s approval of a registration statement guarantees the quality and safety of
the securities to be issued.
a. True
b. False
 
 
26.
Securities firms engage in proprietary trading, which means that they serve as an intermediary by trading shares of
stock requested by proprietorships.
a. True
b. False
 
 
28.
Securities firms that converted to bank holding companies during the credit crisis:
a. gained more flexibility to obtain financing from the Federal Reserve.
b. had to give up their traditional securities function of underwriting.
c. came under greater regulatory oversight by the Securities Investor Protection Corporation.
d. were prohibited from investing in or selling mortgage-backed securities.
 
 
29.
Under SEC Rule 144A, firms may engage in private placements of stock without filing the extensive registration
statement that is required for public placements.
a. True
b. False
 
 
30.
Unlike the standardized provisions of a publicly placed issue, the provisions of a privately placed bond issue can be
tailored to the desires of the purchaser.
a. True
b. False
 
 
31.
The value of a securities firm is typically ____ related to interest rate movements
a. positively
b. not
c. inversely
d. A or B
 
 
 
 
 
 
 
 
 

32.
When an IPO is planned, all information relevant to the security, as well as the agreement between the issuer and the
securities firm, must be included in the ___________ that is submitted to the Securities and Exchange Commission.
a. origination
b. registration statement
c. best-efforts agreement
d. none of the above
 
 
33.
When a stock offering is based on a firm commitment, this means that the securities firm does not guarantee a price to
the issuing corporation.
a. True
b. False
 
 
34.
When facilitating a secondary stock offering, a securities firm commonly performs all of the following functions
except _____
a. origination.
b. underwriting the stock.
c. distribution of the stock.
d. its own purchase of at least 20 percent of the offering
 
 
35.
When securities firms facilitate an IPO, they attempt to price the stock:
a. at a level that will enable institutional investors who invest in the IPO to earn reasonable returns.
b. high enough to satisfy the issuing firm.
c. at a level that will enable the securities firms to place the entire issue.
d. all of the above
 
 
36.
When securities firms facilitate initial public offerings, they attempt to price the stock high enough to satisfy the
issuing firm.
a. True
b. False
 
 
39.
Which of the following is not a service that is commonly performed by a securities firm?
a. setting regulatory rules for stock exchanges
b. origination
c. underwriting
d. distribution
 
 
 
 
 
 
 
 
 

 

3.
A(n) ____ discloses relevant financial data on a firm issuing securities, and the provisions applicable to the security.
a. SEC preferred disclosure form
b. 1040 disclosure form
c. shelf-registration
d. prospectus
 
 
5.
Asset-stripping refers to
a. acquiring shares in a firm, causing the firm to repurchase the shares at a premium to prevent a takeover.
b. financing provided by securities firms to help support an acquisition.
c. investing in the shares of a firm that is anticipated to experience a leveraged buyout (LBO).
d. acquiring a firm and selling off individual divisions of the firm separately.
 
 
9.
Employees of a securities firm are less likely to engage in unethical behavior when the firm rewards employees with higher compensation based on:
a. the number of transactions that employees execute for clients.
b. clients’ assessments of the employees’ services.
c. the amount of specific securities from the firm’s holdings that employees sell to clients.
d. the number of transactions that the employees promote to clients in which the firm is the counterparty.
 
 
10.
Flotation costs as a percentage of the value of securities issued are ____ for ____ issues.
a. lower; small
b. lower; large
c. higher; large
d. A and C
 
 
11.
Funds received from a bridge loan are commonly used to
a. purchase junk bonds.
b. purchase high-grade corporate bonds.
c. provide temporary financing for an acquisition.
d. provide financing for individual investors that wish to purchase Treasury bonds.
 
 
13.
____ is motivated by the perception that the sum of the parts is sometimes greater than the whole.
a. Bridging
b. Asset stripping
c. Greenmail
d. None of the above
 
 
 
 
 
 
 
 
 
 
 
 
 

17.
The one-day return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors who purchase the shares a day after the IPO are generally ____.
a. high; high
b. high; low
c. low; high
d. low; low
 
 
19.
The process of obtaining mortgages from the financial institutions that originated them, bundling the mortgages into tranches based on their risk level, and selling the tranches to institutional investors is called:
a. mortgage stripping.
b. mortgage underwriting.
c. securitization.
d. intermediation.
 
 
20.
The ____ regulates the issuance of securities.
a. Securities and Exchange Commission
b. National Association of Securities Dealers
c. Federal Reserve Board
d. Securities Investor Protection Corporation
 
 
23.
Securities firms commonly engage in all of the following functions except
a. proprietary trading
b. underwriting stock
c. operating mutual funds
d. brokerage services
e. operating credit unions
 
 
24.
Securities firms commonly perform all of the following functions except for _____ when facilitating a secondary stock offering.
a. origination
b. underwriting stock
c. distribution of stock
d. its own purchase of at least 20 percent of the offering
 
 
25.
Securities firms facilitate IPOs in the ____ market; they facilitate the trades of stocks between investors in the ____ market.

a. primary; primary
b. secondary; primary
c. primary; secondary
d. secondary; secondary
 
 
 
 
 
 
 
 
 

28.
The underwriting spread on newly issued bonds is normally ____ that on newly issued stock.
a. less than
b. greater than
c. about the same as
d. less than (for newly issued preferred stock) but greater than (for newly issued common stock)
 
 
30.
When a securities firm provides a bridge loan, it would most likely be
a. to a corporation until the corporation raises funds in other ways.
b. to a commercial bank in the federal funds market.
c. to a mutual fund that needs cover share redemptions.
d. to an investor who needs to cover his margin from buying stock.
 
 
33.
When the stock market is depressed, stock transactions tend to decline, causing a reduction in business for securities firms. This is an example of ____ risk.
a. interest rate
b. credit
c. market
d. exchange rate
 
 
35.
Which of the following is not a major function of the securities industry?
a. brokerage
b. raising new capital
c. underwriting
d. decisions regarding open market operations
 
 
36.
Which of the following is not an example of a securities firm that experienced financial problems as a result of taking on excessive risk when engaging in proprietary trading?
a. Washington Mutual
b. Société Générale
c. Bear Stearns
d. Barings Bank
 
 
 
 
 
 
 
 
 

 

 

1.
The adverse selection problem as related to the insurance industry means that people who have insurance are less likely to suffer losses than people who do not have insurance.
a. True 
b. False
 
 
2.
____ are the most popular assets of life insurance companies. 
a. Corporate stocks and corporate debt securities
b. Treasury securities
c. Mortgages and mortgage-backed securities
d. State and local bonds
 
 
3.
Bond insurance is available only for corporate bonds and not for municipal securities. 
a. True
b. False
 
 
4.
____ effectively reallocates a portion of an insurance company’s return and risk to other insurance companies. 
a. Reinsurance
b. Cash flow underwriting 
c. Factor insurance
d. Universal insurance
 
 
5.
The ____ facilitates cooperation among the various state agencies whenever an insurance issue is a national concern. 
a. Securities and Exchange Commission
b. Federal Deposit Insurance Corporation
c. National Association of Insurance Commissioners
d. National Association of Securities Dealers e. none of the above
 
 
6.
Group insurance policies are very popular for employers and employees. 
a. True
b. False
 
 
7.
Individuals who are insured under a managed health care plan can usually choose any provider of health care services. 
a. True
b. False
 
 
8.
Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity. 
a. less; less
b. more; more
c. less; more
d. none of the above
 
 
9.
An insurance company’s liquidity is measured as
a. net profit minus losses
b. premium income minus policy expenses
c. invested assets divided by loss reserves and unearned premium reserves 
d. none of the above
 
 
11.
____ insurance covers losses due to dishonest employees.
a. Key employee 
b. Credit line
c. Malpractice
d. Fidelity bond
 
 
13.
____ insurance provides insurance for a policyholder only over a specified period. 
a. Term
b. Whole life 
c. Universal 
d. A and C
 
 
14.
____ is(are) not a typical source of funds for life insurance companies. 
a. Deposit insurance premiums
b. Annuity plans
c. Investment income
d. Life and health insurance premiums
 
 
16.
A ____ life insurance company is owned by its policyholders; most life insurance companies are ____. 
a. stock-owned; mutual
b. mutual; mutual
c. stock-owned; stock-owned
d. mutual; stock-owned
 
 
17.
The moral hazard problem as related to the insurance industry means that some people take more risks once they are insured.
a. True 
b. False
 
 
18.
Mortgage insurance protects:
a. homeowners against damage to their home such as from storms or fire.
b. homeowners in the event that they cannot make their mortgage payments.
c. the lender who provided the mortgage in the event that the homeowner defaults on the mortgage. 
d. all of the above
 
 
19.
The most common type of mortgage held by life insurance companies are ____ mortgages. 
a. commercial
b. residential
c. farm
d. none of the above
 
 
20.
The most common use of funds for property and casualty insurance companies is for 
a. corporate bonds and municipal securities.
b. Treasury bills.
c. corporate stock.
d. commercial paper.
 
 
 
 
 
 
 
 
 
 
 
 

21.
Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance. 
a. True
b. False
 
 
22.
The practice of adapting insurance prices to interest rates by lowering premiums when interest rates rise and raising premiums when interest rates decline is called:
a. cyclical rate adjusting.
b. collateralizing premiums. 
c. cash flow underwriting. 
d. reinsurance.
 
 
23.
The primary source of funds for a life insurance company income is 
a. life insurance premiums.
b. annuity plans.
c. health insurance premiums.
d. investment income. e. none of the above
 
 
24.
Property and casualty insurance and life insurance are similar in terms of the predictability of payouts to cover claims. 
a. True
b. False
 
 
25.
Property and casualty (PC) insurance companies may use cash flow underwriting, in which they tend to lower their premium prices as interest rates rise.
a. True
b. False
 
 
26.
The ratio of an insurance company’s net profit to policyholders’ surplus is called 
a. liquidity ratio.
b. return on net worth.
c. net underwriting margin. 
d. return on assets.
 
 
27.
Real estate values usually have little impact on the market value of a life insurance company’s asset portfolio and only affect property and casualty insurance companies.
a. True 
b. False
 
 
28.
Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy.
a. whole life insurance
b. term insurance
c. variable life insurance 
d. universal life insurance
 
 
29.
Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies?
a. Property and casualty policies are longer term.
b. The type of policies offered by life insurance companies are less focused.
c. Future compensation amounts paid on property and casualty policies are more difficult to forecast. 
d. Life insurance companies need to maintain a more liquid asset portfolio.
 
 
31.
Which of the following is not involved in the regulation of the insurance industry? 
a. the National Association of Insurance Commissioners (NAIC)
b. the Insurance Regulatory Information System (IRIS)
c. the Federal Deposit Insurance Corporation (FDIC)
d. All of the above are involved in the regulation of the insurance industry.
 
 
 
 
 
 
 
 
 

33.
Which type of life insurance policy can offer flexibility on the size and timing of premium payments?
a. whole life
b. term
c. universal life
d. decreasing term
 
 
35.
Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?
a. whole life
b. term
c. decreasing term 
d. universal life
 
 
36.
With a(n) ____ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ, depending on the assets backing the policy.
a. universal life 
b. whole life
c. variable life 
d. group life
e. none of the above
 
 
 
 
 
 
 
 
 

 

1.
The adverse selection problem in insurance occurs because:
 
 
2.
All regulation of insurance companies is performed by
 
 
3.
The asset composition of private pension portfolios is most heavily concentrated in
 
 
4.
Because life insurance companies carry a large amount of ____ securities, the market value of their asset portfolio can be ____ to interest rate fluctuations.
 
 
8.
If a pension fund holds long-term, fixed-rate bonds, the market value of the portfolio will ____ during periods when interest rates ____.
 
 
9.
If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matched funding and projective funding, ____ is more flexible for portfolio managers.
 
 
11.
In a ____ strategy, investment decisions are made with the objective of generating cash flows that match planned outflow payments.
 
 
12.
In periods when the risk-free interest rate ____ substantially, the required rate of return by bondholders ____, and most bond portfolios managed by pension funds perform ____.
 
 
15.
____ insurance covers losses due to lawsuits by dissatisfied customers.
 
 
16.
The insurance premium is ____ related to the uncertainty about the size of the payments; the premium is also ____ for group plans.
 
 
17.
____ insurance protects the policyholders until death or as long as premiums are promptly paid.
 
 
19.
Investing in a bond index portfolio is an example of a(n) ____ approach. Investing in an equity portfolio that mirrors the stock market is an example of a(n) ____ approach.
 
 
20.
____ is not a typical source of funds to life insurance companies.
 
 
22.
Life insurance companies can reduce their exposure to ____ risk by diversifying the age distribution of their customer base.
 
 
24.
A life insurance policy that protects the policyholder until death, or as long as premiums are promptly paid is a
 
 
25.
____ life insurance specifies a period of time over which the policy will exist but also builds a cash value for policyholders over time.
 
 
29.
Most pension fund contributions are contributed by the
 
 
30.
A pension fund’s bond portfolio is not directly affected by
 
 
32.
Pension funds managed by life insurance companies concentrate on
 
 
34.
A pension plan that provides benefits that are determined by the accumulated contributions and return on the fund’s investment performance is called a ____ plan.
 
 
35.
Pension portfolios managed by trusts are expected to offer ____ returns than those managed by insurance companies and have a(n) ____ degree of risk.
 
 
36.
Pension portfolios managed by trusts concentrate on
 
 
37.
Pension portfolios managed by trusts offer potentially ____ returns than insured plans and have a ____ degree of risk.
 
 
40.
The primary source of life insurance company income is a result of
 
 
 
 
 
 
 
 
 
 
 

41.
The problems that some state government agencies are experiencing with underfunded pension plans can be attributed to:
 
 
42.
Property and casualty (PC) insurance differs from life insurance in all of the following ways, except
 
 
44.
____ represent the most popular asset of life insurance companies.
 
 
45.
There are more defined ____ pension plans; there are more participants in defined ____ plans.
 
 
46.
To reduce interest rate risk, pension fund managers can
 
 
48.
____ usually require individuals to choose a primary care physician.
 
 
49.
When long-term interest rates are very low, the future returns that a pension fund can earn on long-term low-risk bonds are __________ if the bonds are held to maturity; if the bonds are not held to maturity, there is ____________ potential for their prices to increase.
 
 
51.
Which of the following is not a common use of funds by life insurance companies?
 
 
52.
Which of the following is not a difference between PC insurance and life insurance?
 
 
53.
Which of the following is not a ratio (or group of ratios) commonly used by insurance regulators to detect any problems in time to search for a remedy before the company deteriorates further?
 
 
55.
Which of the following statements is incorrect?
 
 
59.
Which type of life insurance policy specifies a limited period of time over which the policy will exist, and builds a cash value for policyholders over time?
 
 
60.
With a(n) ____ plan, contributions are dictated by the benefits that will eventually be provided.