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8/17/2019 Mishkin Tb12

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Chapter 12 Nonbank Finance 161

Chapter 12Nonbank Finance

)1 Multiple Choice

()a The federal regulatory agency responsible for regulating the activities of life insurancecompanies is

()b the F!C"

()c the Fed"()d the F#$%&"

()e none of the above' there is no such federal regulatory agency"

nser*+uestion &tatus* ,revious -dition

()f .hich of the folloing is true of life insurance companies/

()g They hold long0term assets that are not particularly liuid"

()h They hold short0term liuid assets"

()i ,ayouts to policyholders are relatively predictable"

() %oth (a) and (c) of the above"


()k $ife insurance companies are regulated by state governments because

()l they have never e3perienced bankruptcy"

()m they have never e3perienced profitability"

()n they have never e3perienced idespread failures"

()o they hold only highly liuid assets"

()p they are insured by the federal government"

+uestion &tatus* Ne

() The insurance industry4s share of total financial intermediary assets fell because of

()r poor investment returns in the 156s and 157s"

()s idespread failures of life insurance companies"

()t federal regulations limiting the sale of life insurance"

()u unpredictability of payouts"

()v all of the above"

nser*+uestion &tatus* Ne


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162 Frederic &" 8ishkin 9 Economics of Money, Banking, and Financial Markets, &eventh -dition

() n e3ample of permanent insurance is :::::::::: insurance; and an e3ample of temporaryinsurance is ::::: insurance"

()3 hole life' universal

()y hole life' variable life

()< hole life' term

()aaterm' hole life

()bb term' variable life


()cc contract reuiring payment of an annual premium in e3change for the payment of a futurestream of payments beginning at a specified age and continuing until death is

()dd hole life insurance"

()eean annuity"

()ff term life insurance"

()gg variable life insurance"

()hh universal life insurance"


()ii The key factor causing life insurance companies to move into the management of pensionfunds as

() the investment e3pertise of insurance companies"

()kk a reuest for this change by managers of pension funds"

()ll a change in state las"

()mm a change in federal legislation"

()nn all of the above"

nser*

+uestion &tatus* Ne()oo ,roperty and casualty insurance companies hold the largest share of their assets in

()pp long0term government bonds"

() short0term government securities and commercial paper"

()rr ta30e3empt municipal bonds"

()ss medium0term corporate bonds"


()tt ,roperty and casualty insurance companies are organi


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Chapter 12 Nonbank Finance 16=

()yy >elative to life insurance companies; property and casualty insurance companies hold

()einsurance

()eee allos insurance companies to reduce their risks of e3posure by allocating a portion of therisk to another company in e3change for a portion of the premium"

()fffallos insurance companies to reduce their risks of e3posure by allocating a portion of the risk tothe insured in e3change for a rebate on the premium"

()ggg allos the insured to reduce the premium by accepting a portion of the risk that ouldotherise be allocated to the insurance company"

()hhh is none of the above"

nser*

+uestion &tatus* ,revious -dition

()iii !nsurance companies reduce risk e3posure in e3change for a portion of their insurance premiums by obtaining

() government loan guarantees"

()kkk federal insurance"

()lllreinsurance"

()mmm all of the above"

()nnn both (a) and (c) of the above"


()ooo The specialty of $loyd4s of $ondon is()ppp annuities"

() hedge funds"

()rrr mutual funds"

()sss underriting"

()tttreinsurance"

nser*+uestion &tatus* &tudy ?uide

()uuu !n recent years; bank regulatory authorities have

()vvv encouraged banks to enter the insurance field"

() discouraged banks to enter the insurance field"()333 asked Congress to rite ne legislation that ould make it illegal for banks to enter the

insurance field"

()yyy asked Congress to rite ne legislation that ould make it legal for banks to enter theinsurance field"



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16@ Frederic &" 8ishkin 9 Economics of Money, Banking, and Financial Markets, &eventh -dition

()


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Chapter 12 Nonbank Finance 16A

()yyyy !n the case of an insurance policy; ::::: occurs hen the e3istence of insurance encouragesthe insured party to take risks that increase the likelihood of an insurance payoff' ::::: occurshen those most likely to get large insurance payoffs are the ones ho ant to purchase insurancethe most"

()


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()bbbbbb !nsurance companies4 attempts to minimi


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()bbbbbbb To prevent the moral ha


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16D Frederic &" 8ishkin 9 Economics of Money, Banking, and Financial Markets, &eventh -dition

()dddddddd The fact that insurance companies charge young males higher automobile insurance premiums than young females is an e3ample of

()eeeeeeeerisk0based premiums"

()ffffffff an attempt to minimi


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()eeeeeeeee .hen a life0long chain smoker attempts to purchase a life insurance policy;

()fffffffff the life insurance company faces the problem of adverse selection"

()ggggggggg the smoker can e3pect 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"

() only (a) and (b) of the above"


()kkkkkkkkk $ife insurance companies face the problem of adverse selection hen

()lllllllll persons ho have contracted !& attempt to purchase life insurance"

()mmmmmmmmm life0long 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"


() %ecause young males have a much higher rate of accidents on average than youngfemales; automobile insurers ill be likely to

()rrrrrrrrr charge young males higher insurance premiums than young females; all else eual"

()sssssssss encourage young males to purchase collision insurance policies ith relatively highdeductibles"

()tttttttttencourage young females to purchase collision insurance policies ith no deductibles"

()uuuuuuuuu all of the above"

()vvvvvvvvv only (a) and (b) of the above"


() %ecause insurance companies cannot alays screen good from bad risks; and because policyholders may behave in a manner that increases the likelihood of insurance payouts;they

()333333333 base premiums on the risk classification of the policyholder"

()yyyyyyyyy hire investigators to uncover fraudulent claims"

()


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()cccccccccc %ecause insurance companies cannot alays screen good risks from bad; and because policyholders may behave in a manner that increases the likelihood of insurance payouts;insurance companies

()dddddddddd charge flat0rate premiums based on orse0case scenarios"

()eeeeeeeeee hire investigators to uncover fraudulent claims"

()ffffffffff reuire that policyholders purchase all their insurance from ust one company"

()gggggggggg do all of the above"()hhhhhhhhhh do only (a) and (b) of the above"


()iiiiiiiiii The higher the insurance coverage; the ::::: the policyholder can gain from risky activitiesthat make an insurance payoff ::::: likely"

() more' less

()kkkkkkkkkk more' more

()llllllllll less' less

()mmmmmmmmmm less' more


()nnnnnnnnnn %eteen 156 and 22; pension funds4 share of total financial intermediary assetsincreased from ::::: percent to ::::: percent"

()oooooooooo A' =A

()pppppppppp 1' =A

() 1' =

()rrrrrrrrrr A' =

nser*+uestion &tatus* >evised

()ssssssssss Eesting 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 beingentitled to receive benefits"

()vvvvvvvvvv the length of time until a C matures"

() the premium reuired under term insurance"


()3333333333 defined0benefit pension

()yyyyyyyyyy determines benefits by contributions and their earnings"

()


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()ddddddddddd defined0defined contribution pension plan

()eeeeeeeeeee determines benefits by contributions and their earnings"

()ffffffffffffi3es benefits in advance"

()ggggggggggg may be underfunded"

()hhhhhhhhhhh all of the above"

()iiiiiiiiiii both (a) and (c) of the above"


() !f 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"


()ppppppppppp !f a pension fund has insufficient contributions and earnings to pay benefits; it issaid it be

() underfunded"

()rrrrrrrrrrr vested"

()sssssssssss fully funded"

()ttttttttttt both (a) and (b) of the above"

()uuuuuuuuuuu both (b) and (c) of the above"


()vvvvvvvvvvv Fraudulent practices and other abuses of private pension funds led Congress toenact the

() F!C ct"

()33333333333 Federal >eserve ct"

()yyyyyyyyyyy F#$%&"

()


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()gggggggggggg The -mployee >etirement !ncome &ecurity ct (->!&) established standards for pension plans; including

()hhhhhhhhhhhh rules for vesting"

()iiiiiiiiiiii rules for the degree of underfunding"

() restrictions on investment practices"

()kkkkkkkkkkkk all of the above"

()llllllllllll both (a) and (b) of the above"


()mmmmmmmmmmmm The government corporation that insures pension benefits is

()nnnnnnnnnnnn Fannie 8ae"

()oooooooooooo ?innie 8ae"

()pppppppppppp Freddie 8ac"

() &allie 8ae"

()rrrrrrrrrrrr ,enny %enny"

nser*

+uestion &tatus* Ne

()ssssssssssss The ,ension %enefit ?uarantee Corporation performs a role similar to that of

()tttttttttttt the Federal >eserve &ystem"

()uuuuuuuuuuuu the Comptroller of the Currency"

()vvvvvvvvvvvv the F!C"

() the Bffice of Thrift &upervision"


()333333333333 eough plans and !>s are

()yyyyyyyyyyyy individual pension plans"

()


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Chapter 12 Nonbank Finance 17=

()hhhhhhhhhhhhh The &ocial &ecurity system is an e3ample of a public pension plan that is

()iiiiiiiiiiiii underfunded"

() fully funded"

()kkkkkkkkkkkkk overfunded"

()lllllllllllll none of the above"

nser*


()mmmmmmmmmmmmm &ince social security benefits are paid from current contributions; thesystem is a

()nnnnnnnnnnnnn fully funded system"

()ooooooooooooo overfunded system"

()ppppppppppppp Gpay0as0you0goH system"

() defined contribution system"

()rrrrrrrrrrrrr privati


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17@ Frederic &" 8ishkin 9 Economics of Money, Banking, and Financial Markets, &eventh -dition

()kkkkkkkkkkkkkk ,rivati


15/24

Chapter 12 Nonbank Finance 17A

()mmmmmmmmmmmmmmm The practice of factoring involves

()nnnnnnnnnnnnnnn the syndication of underriting 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"

() spreading the risk of insurance through reinsurance"

()rrrrrrrrrrrrrrr government guarantees of loans"


()sssssssssssssss $oans made to consumers by finance companies are typically

()ttttttttttttttt only for the purchase of cars or boats"

()uuuuuuuuuuuuuuu at interest rates belo 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"

() not made for less than I1;"


()333333333333333 The ?eneral 8otors cceptance Company (?8C) is a()yyyyyyyyyyyyyyy sales finance company"

()


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()oooooooooooooooo 8utual funds are primarily held by

()pppppppppppppppp financial institutions"

() households"

()rrrrrrrrrrrrrrrr nonfinacial businesses"

()ssssssssssssssss the &ocial &ecurity trust fund"

nser*


()tttttttttttttttt !n 15D; only about ::::: percent of households held mutual fund shares; hilethis number has risen to nearly ::::: percent in recent years"

()uuuuuuuuuuuuuuuu =' 2A

()vvvvvvvvvvvvvvvv @' =A

() 6' A

()3333333333333333 D' 6

nser*+uestion &tatus* >evised

()yyyyyyyyyyyyyyyy 8utual funds that allo shares to be redeemed at any time at a price that istied to the asset value of the fund are knon as

()


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()nnnnnnnnnnnnnnnnn sales commission is charged for the purchase of

()ooooooooooooooooo no0load mutual funds"

()ppppppppppppppppp load mutual funds"

() sinking mutual funds"

()rrrrrrrrrrrrrrrrr syndicated funds"

()sssssssssssssssss brokered funds"


()ttttttttttttttttt .hich of the folloing as the fastest0groing financial intermediary of the157s/

()uuuuuuuuuuuuuuuuu Commercial banks

()vvvvvvvvvvvvvvvvv Credit unions

() Finance companies

()33333333333333333 8oney market mutual funds


()yyyyyyyyyyyyyyyyy !n 1577; the assets in money market mutual funds as less than I@ billion' by 15D; assets had climbed to IA billion and no stand at I1;A billion; or about ::::: of theasset value of all mutual funds"

()evised


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()pppppppppppppppppp &everal features distinguish hedge funds from traditional mutual fundsincluding*

() 8utual funds have a minimum investment reuirement of I1; or more'hedge funds have no minimum investment reuirement"

()rrrrrrrrrrrrrrrrrr #edge funds typically charge investors large fees relative to mutual funds"

()ssssssssssssssssss #edge fund investors need not commit their money for than a fe eeks at

a time; e3plaining hy they pay higher fees"()tttttttttttttttttt ll of the above"

()uuuuuuuuuuuuuuuuuu Bnly (a) and (b) of the above"


()vvvvvvvvvvvvvvvvvv &everal features distinguish hedge funds from traditional mutual fundsincluding*

() #edge funds have a minimum investment reuirement of I1;or more"

()333333333333333333 #edge funds typically charge investors large fees relative to mutual funds"

()yyyyyyyyyyyyyyyyyy #edge fund investors need not commit their money for than a fe eeks ata time; e3plaining hy they pay higher fees"

()


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()nnnnnnnnnnnnnnnnnnn $ong0Term Capital got into trouble hen it thought that the spread beteen prices on long0term Treasury bonds and long0term corporate bonds as too ::::; and bet that this GanomalyH ould disappear and the spread ould :::::"

()ooooooooooooooooooo high' narro

()ppppppppppppppppppp lo' iden

() lo' narro

()rrrrrrrrrrrrrrrrrrrhigh' idennser*+uestion &tatus* >evised

()sssssssssssssssssss Bf the folloing financial intermediaries; hich holds the least liuidassets/

()ttttttttttttttttttt ,roperty and casualty insurance companies

()uuuuuuuuuuuuuuuuuuu $ife insurance companies

()vvvvvvvvvvvvvvvvvvv 8oney market mutual funds

() Commercial banks

nser*


()3333333333333333333 Financial intermediaries include

()yyyyyyyyyyyyyyyyyyy commercial banks"

()


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()pppppppppppppppppppp !n order to promote residential housing; the government hascreated the folloing agencies to provide funds to the mortgage market by selling bonds and usingthe proceeds to buy mortgages*

() Fannie 8ae"

()rrrrrrrrrrrrrrrrrrrr ?innie 8ae"

()ssssssssssssssssssss &allie 8ae"

()tttttttttttttttttttt all of the above"()uuuuuuuuuuuuuuuuuuuu only (a) and (b) of the above"


()vvvvvvvvvvvvvvvvvvvv Bf the three agencies that have been created to promote residential housing;the only one that is an entity of the J"&" government is

() the Federal National 8ortgage ssociation"

()33333333333333333333 the ?overnment National 8ortgage ssociation"

()yyyyyyyyyyyyyyyyyyyy the Federal #ome $oan 8ortgage Company"

()


21/24

Chapter 12 Nonbank Finance 1D1

()rrrrrrrrrrrrrrrrrrrrr &hould Fannie 8ae or Freddie 8ac fail; the costs ould be born by

()sssssssssssssssssssss their shareholders"

()ttttttttttttttttttttt their customers"

()uuuuuuuuuuuuuuuuuuuuu the ta3payers"

()vvvvvvvvvvvvvvvvvvvvv all of the above"

() both (a) and (c) of the above"


()333333333333333333333 .hen a corporation ishes to sell its securities; it usually employs

()yyyyyyyyyyyyyyyyyyyyy a takeover specialist"

()


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1D2 Frederic &" 8ishkin 9 Economics of Money, Banking, and Financial Markets, &eventh -dition

()tttttttttttttttttttttt !,Bs have become very important in the J"&" economy because they are a maorsource of financing for

()uuuuuuuuuuuuuuuuuuuuuu so0called Gblue0chipH companies"

()vvvvvvvvvvvvvvvvvvvvvv hedge funds"

() internet companies"

()3333333333333333333333 mutual funds"


()yyyyyyyyyyyyyyyyyyyyyy !nvestment banks purchase ne security issues in the hope ofmaking a profit" This is the act of

()


23/24

Chapter 12 Nonbank Finance 1D=

()vvvvvvvvvvvvvvvvvvvvvvv ::::: assist in the initial sale of securities in the primary market' ::::: assist in the trading of securities in the secondary markets"

() commercial banks' hedge funds

()33333333333333333333333 commercial banks' mutual funds

()yyyyyyyyyyyyyyyyyyyyyyy investment banks' securities brokers and dealers

()


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1D@ Frederic &" 8ishkin 9 Economics of Money, Banking, and Financial Markets, &eventh -dition

()yyyyyyyyyyyyyyyyyyyyyyyy -limination of minimum brokerage commission rates occurred because of

()

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