Chapter 13

Nondepository Financial Institutions

D2Factual
1. Life insurance companies are supervised and regulated by the A) Federal Home Loan Bank Board. B) Securities and !change "ommission. ") states in #hich they operate. $) Federal %eserve. Ans#er& "

D1Factual
'. A mutual life insurance company is o#ned and controlled by its A) partners. B) managers. ") stockholders. $) policyholders. Ans#er& $

D1Factual
(. A stock life insurance company is o#ned and controlled by its A) partners. B) managers. ") stockholders. $) policyholders. Ans#er& $

D1Factual
). *ver +, percent of life insurance companies are structured as ------------------ companies. *ver ., percent of industry assets are controlled by companies structured as ------------------ companies. A) mutual/ mutual B) mutual/ stock ") stock/ mutual $) stock/ stock Ans#er& "

150

151%itter0Silber01dell Money, Banking, and Financial Markets / leventh dition

D2Factual
.. 2n recent years the life insurance industry has emphasi3ed A) #hole life policies. B) group insurance. ") less risky investments. $) the purchase of short4term assets. Ans#er& B

D2Factual
5. For a #hole life policy/ the policy holder pays A) premiums based on current interest rates. B) a constant premium. ") premiums that vary #ith mortality risk. $) constantly declining premiums. Ans#er& B

D2Factual
6. For term life insurance/ the policy holder pays A) premiums based on current interest rates. B) a constant premium. ") premiums that vary #ith mortality risk. $) constantly declining premiums. Ans#er& "

D2Interpretive
7. Life insurance companies have increased their purchases of corporate stock in recent years in an effort to A) reduce risk. B) increase asset returns. ") increase li8uidity. $) reduce ta!es. Ans#er& B

D1Factual
+. 1niversal life insurance #as created in response to A) the popularity of #hole life insurance. B) the popularity of variable life insurance. ") high interest rates. $) deregulation of banking. Ans#er& "

"hapter 1(9ondepository Financial 2nstitutions 152

D2Factual
1,. 2n a:n) ------------------ insurance policy/ the savings component is allocated among a menu of investment options. A) #hole B) term ") universal $) variable Ans#er& $

D2Factual
11. 2n a:n) ------------------ insurance policy/ the savings component pays a money market rate of interest that changes #ith market conditions. A) #hole B) term ") universal $) variable Ans#er& "

D1Factual
1'. A type of life insurance #ith separate pure4insurance and savings components is A) #hole life insurance. B) universal life insurance. ") term life insurance. $) group life insurance. Ans#er& B

D2Factual
1(. 2n a:n) ------------------ insurance policy/ there is no savings component. A) #hole B) term ") universal $) variable Ans#er& B

D2Factual
1). An employee #ho retains earned pension benefits after leaving a ;ob has a pension plan that is A) #hole life. B) guaranteed. ") vested. $) funded. Ans#er& "

153%itter0Silber01dell Money, Banking, and Financial Markets / leventh dition

D2Factual
1.. 1ntil the 1+7,s most private pension plans #ere <defined ------------------= plans under #hich the periodic employer payment into the plan #as ------------------. A) benefit/ variable B) benefit/ preset ") contribution/ variable $) contribution/ preset Ans#er& A

D2Factual
15. >ension plans in #hich employer contributions are set by the plan and benefits depend on the performance of the assets in the plan is called a A) defined benefit plan. B) defined contribution plan. ") a fully vested plan. $) an unfunded plan. Ans#er& B

D2Factual
16. >ension plans in #hich employee benefits are set by the plan and the employer contributions are ad;usted to meet those benefits is called a A) defined benefit plan. B) defined contribution plan. ") a fully vested plan. $) an unfunded plan. Ans#er& A

D2Factual
17. A fully funded pension liability is one in #hich A) the >ension Benefit ?uaranty "orporation insures full benefit payments. B) enough money has been set aside to ensure that the promised pension can be paid out after allo#ing for interest payments. ") the yield on the pension fund is e8ual to the inflation rate. $) corporation pension contributions are e8ual to employee contributions. Ans#er& B

D2Applied
1+. Suppose a ne# employee is promised a pension payment of @7,,, in the t#enty4fourth year after ;oining the firm. Ahe current pension contribution is @1',, a year. Assuming a si! percent rate of return/ their pension plan is said to be A) fully funded. B) partly funded. ") unfunded. $) fully vested. Ans#er& B

"hapter 1(9ondepository Financial 2nstitutions 154

D2Applied
',. Suppose a ne# employee is promised a pension payment of @7,,, in the t#enty4fourth year after ;oining the firm. Ahe current pension contribution of @1',, a year. Assuming an eight percent rate of return/ this pension plan is said to be A) fully funded. B) partly funded. ") unfunded. $) fully vested. Ans#er& B

D2Applied
'1. Suppose a ne# employee is promised a pension payment of @7,,, in the t#enty4fourth year after ;oining the firm. Ahe current pension contribution is @',,, a year. Assuming a si! percent rate of return/ this pension plan is said to be A) fully funded. B) partly funded. ") unfunded. $) fully vested. Ans#er& A

D1Factual
''. Ahe problem of vesting and funding are avoided by ------------------ pension plans. A) both defined benefit and defined contribution B) defined benefit ") defined contribution $) neither defined benefit nor defined contribution Ans#er& "

D2Factual
'(. ------------------ contributions to a defined ------------------ pension plan are ta!4 deferred until retirement. A) mployer/ benefit B) mployer/ contribution ") mployee/ benefit $) mployee/ contribution Ans#er& $

D1Factual
'). >ension funds are partially guaranteed by the A) Social Security Administration. B) Federal $eposit 2nsurance "orporation. ") Federal %eserve. $) >ension Benefit ?uaranty "orporation. Ans#er& $

155%itter0Silber01dell Money, Banking, and Financial Markets / leventh dition

D1Factual
'.. By re8uiring minimum reporting/ disclosure/ vesting/ funding/ and investment standards/ the ------------------ helps safeguard employee pension rights. A) mployee %etirement 2ncome Security Act B) Federal $eposit 2nsurance "orporation ") Social Security Act $) Federal %eserve Ans#er& A

D2Factual
'5. "ompared #ith the average man/ the average #oman pays A) less for health insurance but more for life insurance. B) less for life insurance but more for health insurance. ") more for life and health insurance. $) less for life and health insurance. Ans#er& B

D2Interpretive
'6. Because #omen have a longer average life span than men/ they pay A) more for health insurance. B) less for health insurance. ") more for life insurance. $) less for life insurance. Ans#er& $

D2Interpretive
'7. Because #omen have a longer average life span than men/ they are paid A) higher monthly retirement benefits by a defined benefit pension plan. B) lo#er monthly retirement benefits by a defined benefit pension plan. ") the same monthly retirement benefits by a defined benefit pension plan. $) the amount of monthly benefits paid to men and #omen by a defined benefit plan is determined by each company. Ans#er& $

D2Factual
'+. Bhich of the follo#ing types of insurance do men pay lo#er premiums than do #omenC A) Life insurance. B) Health insurance. ") Auto insurance. $) Ahere are no legally allo#ed differences. Ans#er& B

"hapter 1(9ondepository Financial 2nstitutions 156

D2Factual
(,. >roperty and casualty insurance companies are supervised and regulated by the A) Federal Home Loan Bank Board. B) Securities and !change "ommission. ") states in #hich they operate. $) Federal %eserve. Ans#er& "

D1Factual
(1. %elative to life insurance companies/ the liabilities of property and casualty insurance companies are A) longer4term. B) more unpredictable. ") less risky. $) sub;ect to higher ta!es. Ans#er& B

D2Factual
('. Ahe portfolios of property and casualty insurance companies are generally concentrated in A) li8uid assets. B) mutual funds. ") primary securities. $) 1.S. Areasury bonds. Ans#er& A

D2Interpretive
((. >roperty and casualty insurance companies tend to invest heavily in municipal bonds because A) the bonds have higher yields than corporate bonds. B) property and casualty insurance companies are re8uired by regulators to hold at least ', percent of their assets in the form of municipal bonds. ") the bonds are ta!4e!empt. $) they hold large state and local government pension funds/ thus re8uiring them to hold an e8ual amount of municipal bonds. Ans#er& "

D1Factual
(). 2n dollar terms the most important of all forms of property and casualty insurance is A) automobile liability insurance. B) home o#ners insurance. ") medical malpractice insurance. $) fire insurance. Ans#er& A

157%itter0Silber01dell Money, Banking, and Financial Markets / leventh dition

D2Applied
(.. A portfolio manager for a property and casualty insurance company #ho anticipates a recession is likely to shift the companyDs portfolio into A) short4term securities. B) preferred stock. ") common stock. $) long4term corporate bonds. Ans#er& A

D1Factual
(5. Eutual funds that offer limited shares that are not redeemable are referred to as A) open4end. B) closed4end. ") negotiable. $) nonnegotiable. Ans#er& B

D1Factual
(6. Eutual funds that offer shares that are redeemable are referred to as A) open4end. B) closed4end. ") negotiable. $) nonnegotiable. Ans#er& A

D2Factual
(7. Ahe net asset value of an open4end mutual fund is e8ual to the A) profits of the fund. B) dividends paid out by the fund. ") market value of the securities held by the fund. $) price4earnings ratio of the fund. Ans#er& "

D3Applied
(+. Assume that a no4load open4end mutual fund holds securities #ith a total market value of @1' million/ has no liability/ and has .,,/,,, shares outstanding. Ahe net asset value par share of this fund is A) @'). B) @5,. ") @') million. $) @5, million. Ans#er& A

"hapter 1(9ondepository Financial 2nstitutions 158

D3Applied
),. Assume that a no4load open4end mutual fund holds securities #ith a total market value of @', million/ has no liability/ and has '.,/,,, shares outstanding. Ahe net asset value par share of this fund is A) @. million. B) @7, million. ") @.. $) @7. Ans#er& $

D2Factual
)1. A mutual fund that charges a sales commission is a A) load fund. B) no4load fund. ") closed4end fund. $) premium fund. Ans#er& A

D1Factual
)'. Eanagement structures that include money market funds and bond funds in addition to stock funds are kno#n as A) conglomerates. B) dealers. ") brokers. $) families of mutual funds. Ans#er& $

D2Factual
)(. Bhich of the follo#ing #ould likely be involved in a ne# bond offeringC A) A commercial bank. B) An investment bank. ") A broker. $) A dealer. Ans#er& B

D2Factual
)). 1nlike brokers/ securities dealers A) operate in secondary markets. B) risk capital losses. ") trade <used= securities $) operate in primary markets. Ans#er& B

159%itter0Silber01dell Money, Banking, and Financial Markets / leventh dition

D1Factual
).. Ahe t#o ma;or types of finance company are A) capital market and money market. B) public and private. ") consumer and commercial. $) insured and uninsured. Ans#er& "

D1Factual
)5. Finance companies are the largest issuers of A) commercial paper. B) shares. ") long4term securities. $) repurchase agreements. Ans#er& A

D1Factual
)6. <Bootstrap financings= are buyouts financed by A) the company managersF o#n assets. B) finance companies. ") ;unk bonds. $) ne# issuance of bonds. Ans#er& B

D1Factual
)7. An *ldsmobile dealer may turn to a ------------------ like ?EA" for loans in purchasing vehicles for his inventory. A) investment bank B) broker4dealer ") bootstrap financing company $) captive finance company Ans#er& $

D1Factual
)+. 2nvestment banks operate in the A) secondary market. B) primary market. ") securiti3ed market. $) money market. Ans#er& B

D1Factual
.,. Ahe <primary= market is the market for A) 1.S. government securities. B) ne#ly4issued securities. ") e8uities of <blue chip= companies. $) debt of one year of less in maturity. Ans#er& B

"hapter 1(9ondepository Financial 2nstitutions 160

D1Factual
.1. 1nlike dealers/ brokers A) deal in the primary market. B) deal in e8uity and not in debt. ") do not buy or sell for their o#n account. $) get most of their funds from consumer deposits. Ans#er& "

D2Factual
.'. A leveraged buyout is A) a form of short4term lending to finance companies #hen they buy a company. B) the ac8uisition of a company financed by debt. ") the sale of commercial paper to finance purchases of bundles of securiti3ed non4traded loans. $) borro#ing by finance companies to make loans. Ans#er& B

D1Factual
.(. Ee33anine debt funds hold 8uite ------------------ assets issued by -----------------companies. A) riskyG small to midsi3ed B) riskyG large ") safeG small to midsi3ed $) safeG large Ans#er& A

D2Factual
.). A venture capital fund buys the------------------ of a ne# company and hopes to profit from ------------------. A) debtG repayment of the debt at maturity B) debtG interest payments on that debt ") e8uityG dividends from the e8uity $) e8uityG eventual sale of that e8uity Ans#er& $

D2Factual
... <Subordinated= debt is one form of ------------------ debt. A) me33anine B) uncollaterali3ed ") 3ero4coupon $) risk4free Ans#er& A

161%itter0Silber01dell Money, Banking, and Financial Markets / leventh dition

D2Factual
.5. A me33anine fund A) #ill never buy e8uity in a company. B) may buy only e8uity in a company. ") may buy a combination of e8uity and convertible debt in a company. $) may buy a combination of e8uity and straight debt in a company. Ans#er& $

D2Factual
.6. Banks in the 1nited States still cannot A) o#n finance companies. B) be full4service brokers. ") offer their o#n mutual funds. $) offer merger advisory services. Ans#er& B