Chapter 12 Nonbank Finance

Chapter 12Nonbank Finance161
Chapter 12
Nonbank Finance
)1
Multiple Choice
()a
The federal regulatory agency responsible for regulating the activities of life insurance
companies is
()b the FDIC.
()c the Fed.
()d the FHLBS.
()e none of the above; there is no such federal regulatory agency.
Answer:
Question Status: Previous Edition
()f
Which of the following is true of life insurance companies?
()g They hold long-term assets that are not particularly liquid.
()h They hold short-term liquid assets.
()i Payouts to policyholders are relatively predictable.
()j Both (a) and (c) of the above.
Answer:
()k
Life insurance companies are regulated by state governments because
()l they have never experienced bankruptcy.
()m they have never experienced profitability.
()n they have never experienced widespread failures.
()o they hold only highly liquid assets.
()p they are insured by the federal government.
Question Status: New
()q
The insurance industrys share of total financial intermediary assets fell because of
()r poor investment returns in the 1960s and 1970s.
()s widespread failures of life insurance companies.
()t federal regulations limiting the sale of life insurance.
()u unpredictability of payouts.
()v all of the above.
Answer:
162Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition
()w
An example of permanent insurance is __________ insurance, and an example of temporary

insurance is _____ insurance.
()x whole life; universal
()y whole life; variable life
()z whole life; term
()aaterm; whole life
()bb
term; variable life
Answer:
()cc
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
()dd
whole life insurance.
()eean annuity.
()ff term life insurance.
()gg
variable life insurance.
()hh
universal life insurance.
Answer:
()ii
The key factor causing life insurance companies to move into the management of pension
funds was
()jj the investment expertise of insurance companies.
()kk
a request for this change by managers of pension funds.
()ll a change in state laws.
()mm a change in federal legislation.
()nn
all of the above.
Answer:
()oo
Property and casualty insurance companies hold the largest share of their assets in
()pp
long-term government bonds.
()qq
short-term government securities and commercial paper.
()rr tax-exempt municipal bonds.
()ss medium-term corporate bonds.
Answer:
()tt
Property and casualty insurance companies are organized
()uu
both as stock and mutual companies.
()vv
only as stock companies.
()ww only as mutual companies.
()xx
primarily as cooperatives.
Answer:
()yy
Relative to life insurance companies, property and casualty insurance companies hold
()zzmore liquid assets.
()aaa more long-term government bonds.
()bbb more commercial mortgages.
()ccc fewer municipal bonds.
Answer:
()ddd Reinsurance
()eee allows insurance companies to reduce their risks of exposure by allocating a portion of the
risk to another company in exchange for a portion of the premium.
()fffallows insurance companies to reduce their risks of exposure by allocating a portion of the risk to
the insured in exchange for a rebate on the premium.
()ggg allows the insured to reduce the premium by accepting a portion of the risk that would
otherwise be allocated to the insurance company.
()hhh is none of the above.
Answer:
()iii
Insurance companies reduce risk exposure in exchange for a portion of their insurance
premiums by obtaining
()jjj government loan guarantees.
()kkk federal insurance.
()lll reinsurance.
()mmm all of the above.
()nnn both (a) and (c) of the above.
Answer:
()ooo The specialty of Lloyds of London is
()ppp annuities.
()qqq hedge funds.
()rrr
mutual funds.
()sss underwriting.
()ttt reinsurance.
Answer:
Question Status: Study Guide
()uuu In recent years, bank regulatory authorities have
()vvv encouraged banks to enter the insurance field.
()www discouraged banks to enter the insurance field.
()xxx asked Congress to write new legislation that would make it illegal for banks to enter the
insurance field.
()yyy asked Congress to write new legislation that would make it legal for banks to enter the
insurance field.
Answer:
()zzz A Supreme Court ruling in March 1996 held that

()aaaa state laws to prevent banks from selling insurance can be superseded by federal rulings from
banking regulators that allow banks to sell insurance.
()bbbb state laws to prevent banks from selling insurance cannot be superseded by federal rulings
from banking regulators that allow banks to sell insurance.
()cccc state laws to prevent banks from selling insurance can be superseded only if Congress enacts
legislation that allow banks to sell insurance.
()dddd state laws to prevent banks from selling insurance cannot be superseded by federal
legislation.
Answer:
()eeee 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
()ffff fraudulent claims.
()gggg moral hazard.
()hhhh adverse selection.
()iiii
pecuniary purchases.
Answer:
()jjjj
Some automobile owners will drive faster knowing that they are covered by health and
automobile insurance. This behavior creates the problem of
()kkkk fraudulent claims.
()llll
moral hazard.
()mmmm adverse selection.
()nnnn pecuniary purchases.
Answer:
()oooo 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.
()pppp moral hazard
()qqqq opportunism
()rrrr adverse selection
()ssss shirking
Answer:
()tttt Adverse selection occurs when those _____ likely to get _____ insurance payoffs are the ones
who want to purchase insurance the most.
()uuuu least; large
()vvvv least; small
()wwww most; large
()xxxx most; small
Answer:
()yyyy 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.
()zzzz moral hazard; insurance market discrimination
()aaaaa moral hazard; insurance segregation
()bbbbb moral hazard; adverse selection
()ccccc adverse selection; moral hazard
Answer:
()ddddd Insurance companies attempts to minimize adverse selection and moral hazard explains
which of the following insurance practices?
()eeeee Risk-assessment screening
()fffff Risk-based premiums
()ggggg Restrictive provisions
()hhhhh All of the above
()iiiii Only (a) and (b) of the above
Answer:
()jjjjj Insurance companies attempts to minimize adverse selection and moral hazard explains
()kkkkk Collateral deposits
()lllll Risk-based premiums
()mmmmm
Compensating balances
()nnnnn All of the above
()ooooo Only (a) and (b) of the above
Answer:
()ppppp Insurance companies attempts to minimize adverse selection and moral hazard explains
()qqqqq Collection of information and screening of potential policyholders
()rrrrr Risk-based premiums
()sssss Restrictive provisions
()ttttt All of the above
()uuuuu Only (a) and (b) of the above
Answer:
()vvvvv Insurance companies attempts to minimize adverse selection and moral hazard explains
()wwwww
Gender-neutral premiums
()xxxxx Flat-rate premiums
()yyyyy Restrictive provisions
()zzzzz All of the above
()aaaaaa Only (a) and (b) of the above
Answer:
()bbbbbb Insurance companies attempts to minimize adverse selection and moral hazard explains
()cccccc Collection of information and screening of potential policyholders
()dddddd Risk-based premiums
()eeeeeeCancellation of insurance
()ffffff All of the above
Answer:
()gggggg Insurance companies attempts to minimize adverse selection and moral hazard explains
()hhhhhh Collection of information and screening of potential policyholders
()iiiiii Risk-based premiums
()jjjjjj Deductibles and coinsurance
()kkkkkk All of the above
()llllll Only (a) and (b) of the above
Answer:
()mmmmmm
To prevent adverse selection, health and life insurance companies
()nnnnnn sometimes charge higher premiums to people with certain pre-existing health conditions.
()oooooo require potential policyholders to submit medical records, and may refuse to sell policies to
people with certain pre-existing health conditions.
()pppppp charge the same premiums to all policyholders.
()qqqqqq will do both (a) and (b) of the above.
Answer:
()rrrrrr To prevent adverse selection, health and life insurance companies
()ssssss always charge the same premiums to people regardless of certain pre-existing health
conditions.
()tttttt require potential policyholders to submit medical records, and may refuse to sell policies to
people with certain pre-existing health conditions.
()uuuuuu charge the same premiums to all policyholders.
()vvvvvv will do both (a) and (b) of the above.
Answer:
()wwwwww
To prevent the adverse selection of AIDS patients, health and life insurance
companies
()xxxxxx refuse to grant policies to people living in New York City and Los Angeles.
()yyyyyy require potential policyholders to submit medical records, and may refuse to sell policies to
people with AIDS.
()zzzzzz will do both (a) and (b) of the above.
()aaaaaaa will do neither (a) nor (b) of the above.
Answer:
()bbbbbbb
To prevent the moral hazard problem, insurance companies may write policies
()ccccccc requiring that the insured experience a loss when a claim is made.
()dddddddcontaining provisions that discourage risky behavior.
()eeeeeee limiting the amount the companies will pay in the event that claims are submitted by
policyholders.
()fffffff with all of the above provisions.
()gggggggwith only (a) and (b) of the above provisions.
Answer:
Question Status: Revised
()hhhhhhhTo prevent the moral hazard problem, insurance companies may write policies
()iiiiiii that increase benefits when the insured engages in risky behavior.
()jjjjjjj discourage the insured from engaging in risky behavior.
()kkkkkkkthat increase the amount of insurance when the insured engages in risky behavior.
()lllllll with only (a) and (c) of the above provisions.
Answer:
()mmmmmmm A deductible reduces __________ in exactly the same way as __________
()nnnnnnnmoral hazard; risk-based premiums.
()oooooooadverse selection; restrictive provisions.
()ppppppp
moral hazard; cancellation of insurance.
()qqqqqqqadverse selection; limits on the amount of insurance.
()rrrrrrr moral hazard; coinsurance.
Answer:
()sssssss Coinsurance reduces moral hazard in exactly the same way as
()ttttttt limits on insurance.
()uuuuuuu
risk-based premiums.
()vvvvvvvdeductibles.
()wwwwwww
restrictive provisions.
()xxxxxxx
all of the above.
Answer:
()yyyyyyyIf automobile insurance companies were to be prevented from charging risk-based
premiums, but could selectively screen potential policyholders, the likely effect would be to
()zzzzzzz increase the number of young men obtaining insurance coverage relative to young women.
()aaaaaaaa
decrease the number of young women obtaining insurance coverage relative to
young men.
()bbbbbbbb
decrease the number of young men obtaining insurance coverage relative to young
women.
()cccccccc
both (a) and (b) of the above.
Answer:
()dddddddd
The fact that insurance companies charge young males higher automobile insurance
premiums than young females is an example of
()eeeeeeeerisk-based premiums.
()ffffffff an attempt to minimize adverse selection.
()gggggggg
coinsurance.
()hhhhhhhh
all of the above.
()iiiiiiii only (a) and (b) of the above.
Answer:
()jjjjjjjj Charging risk-based insurance premiums is a time-honored principle of insurance
management to reduce
()kkkkkkkk
moral hazard.
()llllllll adverse selection.
()mmmmmmmm free riding.
()nnnnnnnn
principal-agent problems.
()oooooooo
all of the above
Answer:
()pppppppp
Insurance management tools that give policyholders incentives to avoid accidents
insured against include:
()qqqqqqqq
deductibles.
()rrrrrrrr risk-based premiums
()ssssssss coinsurance.
()tttttttt all of the above.
Answer:
()uuuuuuuu
Clauses in life insurance policies that eliminate death benefits if the insured person
commits suicide is an example of a
()vvvvvvvv
restrictive provision.
()wwwwwwww restrictive covenant.
()xxxxxxxx
anti-fraud exclusion.
()yyyyyyyy
risk-based deductible.
Answer:
()zzzzzzzz
When a life-long chain smoker attempts to purchase a life insurance policy,
()aaaaaaaaa
the life insurance company faces the problem of adverse selection.
()bbbbbbbbb
the smoker can expect to pay a much higher premium than a nonsmoker.
()ccccccccc
the smoker is said to commit fraud.
()ddddddddd
only (a) and (b) of the above.
Answer:
()eeeeeeeee
When a life-long chain smoker attempts to purchase a life insurance policy,
()fffffffff the life insurance company faces the problem of adverse selection.
()ggggggggg
the smoker can expect to pay a much higher premium than a nonsmoker.
()hhhhhhhhh
there may be a limit on the amount of insurance provided.
()iiiiiiiii all of the above.
()jjjjjjjjj only (a) and (b) of the above.
Answer:
()kkkkkkkkk
Life insurance companies face the problem of adverse selection when
()lllllllll persons who have contracted AIDS attempt to purchase life insurance.
()mmmmmmmmm
life-long chain smokers attempt to purchase life insurance.
()nnnnnnnnn
school teachers attempt to purchase life insurance.
()ooooooooo
all of the above attempt to purchase life insurance.
()ppppppppp
only (a) and (b) of the above attempt to purchase life insurance.
Answer:
()qqqqqqqqq
Because young males have a much higher rate of accidents on average than young
females, automobile insurers will be likely to
()rrrrrrrrr charge young males higher insurance premiums than young females, all else equal.
()sssssssss
encourage young males to purchase collision insurance policies with relatively high
deductibles.
()tttttttttencourage young females to purchase collision insurance policies with no deductibles.
()uuuuuuuuu
all of the above.
()vvvvvvvvv
Answer:
()wwwwwwwww Because insurance companies cannot always screen good from bad risks, and
because policyholders may behave in a manner that increases the likelihood of insurance payouts,
they
()xxxxxxxxx
base premiums on the risk classification of the policyholder.
()yyyyyyyyy
hire investigators to uncover fraudulent claims.
()zzzzzzzzz
sometimes require that policyholders share part of the loss by paying deductibles
and coinsurance.
()aaaaaaaaaa
do all of the above.
()bbbbbbbbbb
do only (a) and (b) of the above.
Answer:
()cccccccccc
Because insurance companies cannot always screen good risks from bad, and
because policyholders may behave in a manner that increases the likelihood of insurance payouts,
insurance companies
()dddddddddd
charge flat-rate premiums based on worse-case scenarios.
()eeeeeeeeee
hire investigators to uncover fraudulent claims.
()ffffffffff require that policyholders purchase all their insurance from just one company.
()gggggggggg
()hhhhhhhhhh
do only (a) and (b) of the above.
Answer:
()iiiiiiiiii The higher the insurance coverage, the _____ the policyholder can gain from risky activities
that make an insurance payoff _____ likely.
()jjjjjjjjjj more; less
()kkkkkkkkkk
more; more
()llllllllll less; less
()mmmmmmmmmm
less; more
Answer:
()nnnnnnnnnn
Between 1960 and 2002, pension funds share of total financial intermediary assets
increased from _____ percent to _____ percent.
()oooooooooo
5; 35
()pppppppppp
10; 35
()qqqqqqqqqq
10; 30
()rrrrrrrrrr
5; 30
Answer:
()ssssssssss
Vesting refers to
()tttttttttt the length of time an insurance company has been in business.
()uuuuuuuuuu
the length of time that a person must be enrolled in a pension plan before being
entitled to receive benefits.
()vvvvvvvvvv
the length of time until a CD matures.
()wwwwwwwwww
the premium required under term insurance.
Answer:
()xxxxxxxxxx
A defined-benefit pension
()yyyyyyyyyy
determines benefits by contributions and their earnings.
()zzzzzzzzzz
fixes benefits in advance.
()aaaaaaaaaaa
links benefits to investment performance.
()bbbbbbbbbbb all of the above.
()ccccccccccc
both (b) and (c) of the above.
Answer:
()ddddddddddd A defined-defined contribution pension plan

()eeeeeeeeeee
determines benefits by contributions and their earnings.
()ffffffffffffixes benefits in advance.
()ggggggggggg may be underfunded.
()hhhhhhhhhhh all of the above.
()iiiiiiiiiii both (a) and (c) of the above.
Answer:
()jjjjjjjjjjj If a pension fund has sufficient contributions and earnings to pay benefits, it is said to be
()kkkkkkkkkkk underfunded.
()lllllllllll vested.
()mmmmmmmmmmm
fully funded.
()nnnnnnnnnnn both (a) and (b) of the above.
()ooooooooooo both (b) and (c) of the above.
Answer:
()ppppppppppp If a pension fund has insufficient contributions and earnings to pay benefits, it is
said it be
()qqqqqqqqqqq underfunded.
()rrrrrrrrrrr
vested.
()sssssssssss
fully funded.
()ttttttttttt both (a) and (b) of the above.
()uuuuuuuuuuu both (b) and (c) of the above.
Answer:
()vvvvvvvvvvv Fraudulent practices and other abuses of private pension funds led Congress to
enact the
()wwwwwwwwwww
FDIC Act.
()xxxxxxxxxxx Federal Reserve Act.
()yyyyyyyyyyy FHLBS.
()zzzzzzzzzzz
Employee Retirement Income Security Act.
Answer:
()aaaaaaaaaaaa The Employee Retirement Income Security Act (ERISA) was enacted because of
()bbbbbbbbbbbb mismanagement.
()cccccccccccc fraudulent practices.
()dddddddddddd underfunding.
()eeeeeeeeeeee
all of the above.
()ffffffffffff
both (a) and (c) of the above.
Answer:
()gggggggggggg The Employee Retirement Income Security Act (ERISA) established standards for
pension plans, including
()hhhhhhhhhhhh rules for vesting.
()iiiiiiiiiiii rules for the degree of underfunding.
()jjjjjjjjjjjj restrictions on investment practices.
()kkkkkkkkkkkk all of the above.
()llllllllllll both (a) and (b) of the above.
Answer:
()mmmmmmmmmmmm The government corporation that insures pension benefits is
()nnnnnnnnnnnn Fannie Mae.
()oooooooooooo Ginnie Mae.
()pppppppppppp Freddie Mac.
()qqqqqqqqqqqq Sallie Mae.
()rrrrrrrrrrrr
Penny Benny.
Answer:
()ssssssssssss
The Pension Benefit Guarantee Corporation performs a role similar to that of
()tttttttttttt
the Federal Reserve System.
()uuuuuuuuuuuu the Comptroller of the Currency.
()vvvvvvvvvvvv the FDIC.
()wwwwwwwwwwww
the Office of Thrift Supervision.
Answer:
()xxxxxxxxxxxx Keough plans and IRAs are
()yyyyyyyyyyyy individual pension plans.
()zzzzzzzzzzzz government pension plans.
()aaaaaaaaaaaaa corporate pension plans.
()bbbbbbbbbbbbb public pension plans.
Answer:
()ccccccccccccc Social Security is a
()ddddddddddddd fully funded pension plan.
()eeeeeeeeeeeee federally insured private pension plan.
()fffffffffffff
government sponsored private pension plan.
()ggggggggggggg pay-as-you-go system.
Answer:
()hhhhhhhhhhhhh The Social Security system is an example of a public pension plan that is
()iiiiiiiiiiiii
underfunded.
()jjjjjjjjjjjjj
fully funded.
()kkkkkkkkkkkkk overfunded.
()lllllllllllll
none of the above.
Answer:
()mmmmmmmmmmmmm Since social security benefits are paid from current contributions, the
system is a
()nnnnnnnnnnnnn fully funded system.
()ooooooooooooo overfunded system.
()ppppppppppppp pay-as-you-go system.
()qqqqqqqqqqqqq defined contribution system.
()rrrrrrrrrrrrr
privatized system.
Answer:
()sssssssssssss
Privatization of social security involves
()ttttttttttttt
tax reductions.
()uuuuuuuuuuuuu benefit reductions.
()vvvvvvvvvvvvv increasing the retirement age.
()wwwwwwwwwwwww investing portions of the trust fund in corporate securities.
()xxxxxxxxxxxxx abolishing the system.
Answer:
()yyyyyyyyyyyyy Plans for privatization of social security involve
()zzzzzzzzzzzzz government investment of the trust fund in corporate securities.
()aaaaaaaaaaaaaa shift of trust fund assets to individual accounts that can be invested in private
assets.
()bbbbbbbbbbbbbb
shifting management of the trust fund to private investment managers.
()cccccccccccccc all of the above.
()dddddddddddddd
Answer:
()eeeeeeeeeeeeee Allowing individuals to manage a portion of their social security funds is
()ffffffffffffff
socialization.
()gggggggggggggg
privatization.
()hhhhhhhhhhhhhh
democratization.
()iiiiiiiiiiiiii
regeneration.
()jjjjjjjjjjjjjj
disintermediation.
Answer:
()kkkkkkkkkkkkkk
Privatization of the Social Security system is being considered due to
()llllllllllllll
the desire to reduce taxes.
()mmmmmmmmmmmmmm
demands to reduce the retirement age.
()nnnnnnnnnnnnnn
reduced life expectancy.
()oooooooooooooo
underfunding of the system.
()pppppppppppppp
the fact that returns to corporate securities are always positive.
Answer:
()qqqqqqqqqqqqqq
Compared to commercial banks and thrift institutions, finance companies
are
()rrrrrrrrrrrrrr
heavily regulated.
()ssssssssssssss able to attract small depositors.
()tttttttttttttt
prevented from making relatively small loans.
()uuuuuuuuuuuuuu
virtually unregulated.
Answer:
()vvvvvvvvvvvvvv
When compared to banks, finance companies
()wwwwwwwwwwwwww are virtually unregulated.
()xxxxxxxxxxxxxx
are heavily regulated.
()yyyyyyyyyyyyyy
borrow in large amounts and lend in small amounts.
()zzzzzzzzzzzzzz both (a) and (c) of the above.
()aaaaaaaaaaaaaaa
both (b) and (c) of the above.
Answer:
()bbbbbbbbbbbbbbb
Which of the following is not provided by business finance companies?
()ccccccccccccccc Factoring
()ddddddddddddddd
Leasing equipment
()eeeeeeeeeeeeeee Checking accounts
()fffffffffffffff
All are provided by business finance companies.
Answer:
()ggggggggggggggg
Which of the following is provided by business finance companies?
()hhhhhhhhhhhhhhh
Factoring
()iiiiiiiiiiiiiii
Equipment that can be leased
()jjjjjjjjjjjjjjj
Checking accounts
()kkkkkkkkkkkkkkk
Each of the above
()lllllllllllllll
Only (a) and (b) of the above
Answer:
()mmmmmmmmmmmmmmm
The practice of factoring involves
()nnnnnnnnnnnnnnn
the syndication of underwriting large security issues.
()ooooooooooooooo
the selling of accounts receivable at a discount in return for cash.
()ppppppppppppppp
breaking up large mutual funds into smaller funds.
()qqqqqqqqqqqqqqq
spreading the risk of insurance through reinsurance.
()rrrrrrrrrrrrrrr
government guarantees of loans.
Answer:
()sssssssssssssss Loans made to consumers by finance companies are typically
()ttttttttttttttt
only for the purchase of cars or boats.
()uuuuuuuuuuuuuuu
at interest rates below those charged by banks for the same type of loan.
()vvvvvvvvvvvvvvv
at interest rates above those charged by banks for the same type of loan.
()wwwwwwwwwwwwwww
not made for less than $10,000.
Answer:
()xxxxxxxxxxxxxxx
The General Motors Acceptance Company (GMAC) is a
()yyyyyyyyyyyyyyy
sales finance company.
()zzzzzzzzzzzzzzz consumer finance company.
()aaaaaaaaaaaaaaaa
business finance company.
()bbbbbbbbbbbbbbbb
public finance company.
()cccccccccccccccc
government finance company.
Answer:
()dddddddddddddddd
A person remodeling her house could obtain a loan from a
()eeeeeeeeeeeeeeeesales finance company.
()ffffffffffffffff
consumer finance company.
()gggggggggggggggg
business finance company.
()hhhhhhhhhhhhhhhh
public finance company.
()iiiiiiiiiiiiiiii
government finance company.
Answer:
()jjjjjjjjjjjjjjjj
Before 1970, mutual funds invested almost solely in
()kkkkkkkkkkkkkkkk
corporate bonds.
()llllllllllllllll
corporate common stocks.
()mmmmmmmmmmmmmmmm United States government bonds.
()nnnnnnnnnnnnnnnn
municipal bonds and money market securities.
Answer:
()oooooooooooooooo
Mutual funds are primarily held by
()pppppppppppppppp
financial institutions.
()qqqqqqqqqqqqqqqq
households.
()rrrrrrrrrrrrrrrr nonfinacial businesses.
()ssssssssssssssss the Social Security trust fund.
Answer:
()tttttttttttttttt
In 1980, only about _____ percent of households held mutual fund shares, while
this number has risen to nearly _____ percent in recent years.
()uuuuuuuuuuuuuuuu
3; 25
()vvvvvvvvvvvvvvvv
4; 35
()wwwwwwwwwwwwwwww
6; 50
()xxxxxxxxxxxxxxxx
8; 60
Answer:
()yyyyyyyyyyyyyyyy
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
()zzzzzzzzzzzzzzzz
close-end funds.
()aaaaaaaaaaaaaaaaa
open-end funds.
()bbbbbbbbbbbbbbbbb asset-value funds.
()ccccccccccccccccc
redeemable funds.
Answer:
()ddddddddddddddddd
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
()eeeeeeeeeeeeeeeee
open-end funds.
()fffffffffffffffff close-end funds.
()ggggggggggggggggg
OTC funds.
()hhhhhhhhhhhhhhhhh
primary-issue funds.
Answer:
()iiiiiiiiiiiiiiiii
Most mutual funds are
()jjjjjjjjjjjjjjjjj
no-load funds.
()kkkkkkkkkkkkkkkkk
load funds.
()lllllllllllllllll
large-load funds.
()mmmmmmmmmmmmmmmmm small-load funds.
Answer:
()nnnnnnnnnnnnnnnnn
A sales commission is charged for the purchase of
()ooooooooooooooooo
no-load mutual funds.
()ppppppppppppppppp load mutual funds.
()qqqqqqqqqqqqqqqqq
sinking mutual funds.
()rrrrrrrrrrrrrrrrr syndicated funds.
()sssssssssssssssss
brokered funds.
Answer:
()ttttttttttttttttt
Which of the following was the fastest-growing financial intermediary of the
1970s?
()uuuuuuuuuuuuuuuuu Commercial banks
()vvvvvvvvvvvvvvvvv
Credit unions
()wwwwwwwwwwwwwwwww Finance companies
()xxxxxxxxxxxxxxxxx Money market mutual funds
Answer:
()yyyyyyyyyyyyyyyyy
In 1977, the assets in money market mutual funds was less than $4 billion;
by 1980, assets had climbed to $50 billion and now stand at $1,500 billion, or about _____ of the
asset value of all mutual funds.
()zzzzzzzzzzzzzzzzz
one-tenth
()aaaaaaaaaaaaaaaaaa
one-fourth
()bbbbbbbbbbbbbbbbbb one-third
()cccccccccccccccccc
one-half
Answer:
()dddddddddddddddddd Because the assets they offer individuals are virtually identical, banks face
serious competition from
()eeeeeeeeeeeeeeeeee
load mutual funds.
()ffffffffffffffffff stock mutual funds.
()gggggggggggggggggg closed-end mutual funds.
()hhhhhhhhhhhhhhhhhh bond mutual funds.
()iiiiiiiiiiiiiiiiii
money market mutual funds.
Answer:
()jjjjjjjjjjjjjjjjjj
Several features distinguish hedge funds from traditional mutual funds including:
()kkkkkkkkkkkkkkkkkk Hedge funds have a minimum investment requirement between $100,000
and $20 million.
()llllllllllllllllll
Hedge funds are limited to no more than ninety-nine investors (limited partners).
()mmmmmmmmmmmmmmmmmm
Hedge fund investors must have steady annual incomes of
$200,000 or more or a net worth of $1 million, excluding their homes.
()nnnnnnnnnnnnnnnnnn All of the above.
()oooooooooooooooooo Only (a) and (b) of the above.
Answer:
()pppppppppppppppppp Several features distinguish hedge funds from traditional mutual funds
including:
()qqqqqqqqqqqqqqqqqq Mutual funds have a minimum investment requirement of $1,000 or more;
hedge funds have no minimum investment requirement.
()rrrrrrrrrrrrrrrrrr Hedge funds typically charge investors large fees relative to mutual funds.
()ssssssssssssssssss
Hedge fund investors need not commit their money for than a few weeks at
a time, explaining why they pay higher fees.
()tttttttttttttttttt
All of the above.
()uuuuuuuuuuuuuuuuuu Only (a) and (b) of the above.
Answer:
()vvvvvvvvvvvvvvvvvv Several features distinguish hedge funds from traditional mutual funds
including:
()wwwwwwwwwwwwwwwwww Hedge funds have a minimum investment requirement of $100,000
or more.
()xxxxxxxxxxxxxxxxxx Hedge funds typically charge investors large fees relative to mutual funds.
()yyyyyyyyyyyyyyyyyy Hedge fund investors need not commit their money for than a few weeks at
a time, explaining why they pay higher fees.
()zzzzzzzzzzzzzzzzzz
All of the above.
()aaaaaaaaaaaaaaaaaaa Only (a) and (b) of the above.
Answer:
()bbbbbbbbbbbbbbbbbbb Several features distinguish hedge funds from traditional mutual funds
including:
()ccccccccccccccccccc
Hedge funds have a minimum investment requirement of $100,000 or
more.
()ddddddddddddddddddd Hedge funds typically charge investors smaller fees relative to mutual
funds.
()eeeeeeeeeeeeeeeeeee
Hedge fund investors must commit their money for long periods time (often
several years), which explains why they pay lower fees.
()fffffffffffffffffff All of the above.
()ggggggggggggggggggg Only (a) and (b) of the above.
Answer:
()hhhhhhhhhhhhhhhhhhh The experience of Long-Term Capital demonstrates that
()iiiiiiiiiiiiiiiiiii
hedge funds are far from risk-free, despite their use of market-neutral strategies.
()jjjjjjjjjjjjjjjjjjj
Nobel prize winners can fail to predict the changes in the spread between prices on
government and corporate bonds.
()kkkkkkkkkkkkkkkkkkk the failure of the largest hedge fund had no discernable effect on U.S.
financial markets.
()lllllllllllllllllll
All of the above.
()mmmmmmmmmmmmmmmmmmm
Only (a) and (b) of the above.
Answer:
()nnnnnnnnnnnnnnnnnnn 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 _____.
()ooooooooooooooooooo high; narrow
()ppppppppppppppppppp low; widen
()qqqqqqqqqqqqqqqqqqq low; narrow
()rrrrrrrrrrrrrrrrrrr high; widen
Answer:
()sssssssssssssssssss
Of the following financial intermediaries, which holds the least liquid
assets?
()ttttttttttttttttttt Property and casualty insurance companies
()uuuuuuuuuuuuuuuuuuu Life insurance companies
()vvvvvvvvvvvvvvvvvvv Money market mutual funds
()wwwwwwwwwwwwwwwwwww
Commercial banks
Answer:
()xxxxxxxxxxxxxxxxxxx Financial intermediaries include
()yyyyyyyyyyyyyyyyyyy commercial banks.
()zzzzzzzzzzzzzzzzzzz
insurance companies.
()aaaaaaaaaaaaaaaaaaaa pension funds.
()bbbbbbbbbbbbbbbbbbbb
mutual funds.
()cccccccccccccccccccc all of the above.
Answer:
()dddddddddddddddddddd In order to promote residential housing, the government has created the
following agencies to provide funds to the mortgage market by selling bonds and using the
proceeds to buy mortgages:
()eeeeeeeeeeeeeeeeeeee
the Federal National Mortgage Association.
()ffffffffffffffffffff the Government National Mortgage Association.
()gggggggggggggggggggg the Federal Home Loan Mortgage Company.
()hhhhhhhhhhhhhhhhhhhh all of the above.
()iiiiiiiiiiiiiiiiiiii only (a) and (b) of the above.
Answer:
()jjjjjjjjjjjjjjjjjjjj In order to promote residential housing, the government has created the following
agencies to provide funds to the mortgage market by selling bonds and using the proceeds to buy
mortgages:
()kkkkkkkkkkkkkkkkkkkk Fannie Mae.
()llllllllllllllllllll Ginnie Mae.
()mmmmmmmmmmmmmmmmmmmm
Freddie Mac.
()nnnnnnnnnnnnnnnnnnnn all of the above.
()oooooooooooooooooooo only (a) and (b) of the above.
Answer:
()pppppppppppppppppppp
In order to promote residential housing, the government has
created the following agencies to provide funds to the mortgage market by selling bonds and using
the proceeds to buy mortgages:
()qqqqqqqqqqqqqqqqqqqq Fannie Mae.
()rrrrrrrrrrrrrrrrrrrr
Ginnie Mae.
()ssssssssssssssssssss
Sallie Mae.
()tttttttttttttttttttt all of the above.
()uuuuuuuuuuuuuuuuuuuu
Answer:
()vvvvvvvvvvvvvvvvvvvv 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
()wwwwwwwwwwwwwwwwwwww
the Federal National Mortgage Association.
()xxxxxxxxxxxxxxxxxxxx
the Government National Mortgage Association.
()yyyyyyyyyyyyyyyyyyyy the Federal Home Loan Mortgage Company.
()zzzzzzzzzzzzzzzzzzzz none of the above.
Answer:
()aaaaaaaaaaaaaaaaaaaaa 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
()bbbbbbbbbbbbbbbbbbbbb
Fannie Mae.
()ccccccccccccccccccccc Ginnie Mae.
()ddddddddddddddddddddd
Freddie Mac.
()eeeeeeeeeeeeeeeeeeeee Sallie Mae.
Answer:
()fffffffffffffffffffff Concerns about Fannie Mae and Freddie Mac are based on
()ggggggggggggggggggggg
the large volume of debt that they hold.
()hhhhhhhhhhhhhhhhhhhhh
their low capital-to-asset ratios.
()iiiiiiiiiiiiiiiiiiiii the fact that they are government agencies.
()jjjjjjjjjjjjjjjjjjjjj all of the above.
()kkkkkkkkkkkkkkkkkkkkk
Answer:
()lllllllllllllllllllll Failure of Fannie Mae and Freddie Mac would be a shock to the financial system
because
()mmmmmmmmmmmmmmmmmmmmm of the amount of debt they hold.
()nnnnnnnnnnnnnnnnnnnnn
they have low capital-to-asset ratios.
()ooooooooooooooooooooo
they are federally-sponsored agencies.
()ppppppppppppppppppppp
all of the above.
()qqqqqqqqqqqqqqqqqqqqq
Answer:
()rrrrrrrrrrrrrrrrrrrrr
Should Fannie Mae or Freddie Mac fail, the costs would be born by
()sssssssssssssssssssss
their shareholders.
()ttttttttttttttttttttt their customers.
()uuuuuuuuuuuuuuuuuuuuu
the taxpayers.
()vvvvvvvvvvvvvvvvvvvvv
all of the above.
()wwwwwwwwwwwwwwwwwwwww
Answer:
()xxxxxxxxxxxxxxxxxxxxx
When a corporation wishes to sell its securities, it usually employs
()yyyyyyyyyyyyyyyyyyyyy
a takeover specialist.
()zzzzzzzzzzzzzzzzzzzzz a finance company.
()aaaaaaaaaaaaaaaaaaaaaa
an investment bank.
()bbbbbbbbbbbbbbbbbbbbbb
a commercial bank.
()cccccccccccccccccccccc none of the above.
Answer:
()dddddddddddddddddddddd
In financial markets an IPO is an
()eeeeeeeeeeeeeeeeeeeeee investment portfolio option.
()ffffffffffffffffffffff
initial public offering.
()gggggggggggggggggggggg
initial portfolio offering.
()hhhhhhhhhhhhhhhhhhhhhh
investment portfolio offering.
Answer:
()iiiiiiiiiiiiiiiiiiiiii In financial markets, when a firm issuing new securities has previously issued
securities, these securities are called
()jjjjjjjjjjjjjjjjjjjjjj seasoned issues.
()kkkkkkkkkkkkkkkkkkkkkk
an initial public offering.
()llllllllllllllllllllll secondary issues.
()mmmmmmmmmmmmmmmmmmmmmm investment-grade issues.
()nnnnnnnnnnnnnnnnnnnnnn
private offerings.
Answer:
()oooooooooooooooooooooo
In financial markets, when a firm issues stock for the first time it is
called an
()pppppppppppppppppppppp
investment portfolio option.
()qqqqqqqqqqqqqqqqqqqqqq
initial public offering.
()rrrrrrrrrrrrrrrrrrrrrr
initial portfolio offering.
()ssssssssssssssssssssss investment portfolio offering.
Answer:
()tttttttttttttttttttttt IPOs have become very important in the U.S. economy because they are a major
source of financing for
()uuuuuuuuuuuuuuuuuuuuuu
so-called blue-chip companies.
()vvvvvvvvvvvvvvvvvvvvvv
hedge funds.
()wwwwwwwwwwwwwwwwwwwwww internet companies.
()xxxxxxxxxxxxxxxxxxxxxx
mutual funds.
Answer:
()yyyyyyyyyyyyyyyyyyyyyy
Investment banks purchase new security issues in the hope of
making a profit. This is the act of
()zzzzzzzzzzzzzzzzzzzzzz pawning.
()aaaaaaaaaaaaaaaaaaaaaaa
factoring.
()bbbbbbbbbbbbbbbbbbbbbbb
syndicating.
()ccccccccccccccccccccccc
underwriting.
()ddddddddddddddddddddddd
reinsuring.
Answer:
()eeeeeeeeeeeeeeeeeeeeeee ______ assume the risk of issuing a new stock in the hope of earning
profits on its sale.
()fffffffffffffffffffffff
Stock brokers
()ggggggggggggggggggggggg
Securities dealers
()hhhhhhhhhhhhhhhhhhhhhhh
Underwriters
()iiiiiiiiiiiiiiiiiiiiiii Stock speculators
()jjjjjjjjjjjjjjjjjjjjjjj Reinsurers
Answer:
()kkkkkkkkkkkkkkkkkkkkkkk
Dealers, in contrast to brokers,
()lllllllllllllllllllllll make their living on the spread between the bid price and asked price.
()mmmmmmmmmmmmmmmmmmmmmmm
hold inventories of securities.
()nnnnnnnnnnnnnnnnnnnnnnn
are subject to the risk of falling securities prices.
()ooooooooooooooooooooooo
()ppppppppppppppppppppppp
do only (b) and (c) of the above.
Answer:
()qqqqqqqqqqqqqqqqqqqqqqq
Brokers, in contrast to security dealers,
()rrrrrrrrrrrrrrrrrrrrrrr
hold inventories of securities.
()sssssssssssssssssssssss make their income through commissions.
()ttttttttttttttttttttttt make their living on the spread between the bid price and the asked price.
()uuuuuuuuuuuuuuuuuuuuuuu
Answer:
()vvvvvvvvvvvvvvvvvvvvvvv
_____ assist in the initial sale of securities in the primary market;
_____ assist in the trading of securities in the secondary markets.
()wwwwwwwwwwwwwwwwwwwwwww commercial banks; hedge funds
()xxxxxxxxxxxxxxxxxxxxxxx
commercial banks; mutual funds
()yyyyyyyyyyyyyyyyyyyyyyy
investment banks; securities brokers and dealers
()zzzzzzzzzzzzzzzzzzzzzzz
commercial banks; securities brokers and dealers
()aaaaaaaaaaaaaaaaaaaaaaaa
investment banks; mutual funds
Answer:
()bbbbbbbbbbbbbbbbbbbbbbbb
are well informed is the
()cccccccccccccccccccccccc
()dddddddddddddddddddddddd
()eeeeeeeeeeeeeeeeeeeeeeee
()ffffffffffffffffffffffff
SEC.
()gggggggggggggggggggggggg
Answer:
The federal agency that ensures that potential security purchasers

FCC.
FTC.
NRC.
RFC.
()hhhhhhhhhhhhhhhhhhhhhhhh
An innovation that blurred the distinction between brokerage firms
and commercial banks was Merrill Lynchs development in 1977 of the
()iiiiiiiiiiiiiiiiiiiiiiii cash management account.
()jjjjjjjjjjjjjjjjjjjjjjjj money market mutual fund.
()kkkkkkkkkkkkkkkkkkkkkkkk
individual retirement account.
()llllllllllllllllllllllll discount brokerage.
Answer:
()mmmmmmmmmmmmmmmmmmmmmmmm
A specialist performs the functions of a
()nnnnnnnnnnnnnnnnnnnnnnnn
broker.
()oooooooooooooooooooooooo
dealer.
()pppppppppppppppppppppppp underwriter.
()qqqqqqqqqqqqqqqqqqqqqqqq
all of the above.
()rrrrrrrrrrrrrrrrrrrrrrrr
Answer:
()ssssssssssssssssssssssss A specialist
()tttttttttttttttttttttttt
matches buy and sell orders.
()uuuuuuuuuuuuuuuuuuuuuuuu buys or sells from personal inventory when orders do not match.
()vvvvvvvvvvvvvvvvvvvvvvvv
maintains orderly trading of securities.
()wwwwwwwwwwwwwwwwwwwwwwww
all of the above.
()xxxxxxxxxxxxxxxxxxxxxxxx both (a) and (b) of the above.
Answer:
()yyyyyyyyyyyyyyyyyyyyyyyy
because of
()zzzzzzzzzzzzzzzzzzzzzzzz
()aaaaaaaaaaaaaaaaaaaaaaaaa
()bbbbbbbbbbbbbbbbbbbbbbbbb
()ccccccccccccccccccccccccc
()ddddddddddddddddddddddddd
Answer:
Elimination of minimum brokerage commission rates occurred

competition from banks.
demands of institution investors.
competition from foreign brokerage firms.
changes in state laws.
an action of the securities and Exchange Commission.
()eeeeeeeeeeeeeeeeeeeeeeeee
Internationalization of capital markets has resulted in
()fffffffffffffffffffffffff
foreign companies being listed on the U.S. stock exchanges.
()ggggggggggggggggggggggggg 24-hour trading of stocks.
()hhhhhhhhhhhhhhhhhhhhhhhhh federal regulations prohibiting security transactions on the
Internet.
()iiiiiiiiiiiiiiiiiiiiiiiiiboth (a) and (c) of the above.
()jjjjjjjjjjjjjjjjjjjjjjjjjboth (a) and (b) of the above.
Answer:
()kkkkkkkkkkkkkkkkkkkkkkkkk The financial supermarket concept would provide consumers the
convenience of using one
firm to
()lllllllllllllllllllllllllbuy real estate.
()mmmmmmmmmmmmmmmmmmmmmmmmm obtain a student loan.
()nnnnnnnnnnnnnnnnnnnnnnnnn buy socks.
()ooooooooooooooooooooooooo all of the above.
()ppppppppppppppppppppppppp both (a) and (b) of the above.
Answer:
)2
Essay Questions
()a
Explain the problems that necessitate insurance management, and three methods insurance
companies use to address these problems. Identify the problem that each practice addresses.
()b
Explain why the Social Security system faces problems. Discuss the possible solutions to
these problems.
()c
Explain the factors that account for the large increase in market share experienced by mutual
funds since 1980.

Chapter 12 Nonbank Finance

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Chapter 12Nonbank Finance161

162Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

An example of permanent insurance is __________ insurance, and an example of temporary

Chapter 12Nonbank Finance163

164Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

()zzz A Supreme Court ruling in March 1996 held that

Chapter 12Nonbank Finance165

166Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance167

168Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance169

170Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance171

()ddddddddddd A defined-defined contribution pension plan

172Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance173

174Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance175

176Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance177

178Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance179

180Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance181

182Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Chapter 12Nonbank Finance183

The federal agency that ensures that potential security purchasers

184Frederic S. MishkinEconomics of Money, Banking, and Financial Markets, Seventh Edition

Elimination of minimum brokerage commission rates occurred

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