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245 Questions

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Mood Quizzes & Trivia

Questions and Answers
  • 1. 
      ____ are offered to bank customers who desire to write checks against their account.
  • 2. 
    Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.
    • A. 

      True

    • B. 

      False

  • 3. 
         1.   Which of the following statements is incorrect?
    • A. 

      Banks have expanded their business across services over time.

    • B. 

      Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.

    • C. 

      The banking industry has become less concentrated in recent years.

    • D. 

      All of the statements above are correct.

  • 4. 
     Commercial banks can be a lender or a borrower when using repurchase agreements and loans in the federal funds market.
    • A. 

      True

    • B. 

      False

  • 5. 
    The operations, management, and regulation of a financial conglomerate are the same irrespective of the types of services offered.
    • A. 

      True

    • B. 

      False

  • 6. 
    Which type of savings account transfers funds to a checking account when checks are written?
  • 7. 
    A(n) ____ account provides checking services as well as interest.
  • 8. 
    Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt.
    • A. 

      True

    • B. 

      False

  • 9. 
    A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market.
  • 10. 
      A bank's sources of funds represent liabilities or equity of the bank.
    • A. 

      True

    • B. 

      False

  • 11. 
    Money market deposit accounts differ from conventional time deposits in that they
    • A. 

      Specify a maturity.

    • B. 

      Offer limited check writing privileges.

    • C. 

      Are less liquid.

    • D. 

      None of the above

  • 12. 
     The intent of federal funds transactions is to
    • A. 

      Correct short-term fund imbalances experienced by banks.

    • B. 

      Correct long-term fund imbalances experienced by banks.

    • C. 

      Serve as a permanent source of bank capital.

    • D. 

      Serve as the primary depository source of funds.

  • 13. 
     For any given bank, federal funds ____ represent a(n) ____.
  • 14. 
       14.   The federal funds rate is generally ____ the Treasury bill rate.
    • A. 

      Equal to

    • B. 

      Between .50 percent and 1.00 percent below

    • C. 

      Between .25 percent and 1.00 percent above

    • D. 

      Between 3.00 percent and 4.50 percent above

  • 15. 
       15.   Obtaining funds through ____ is not a common source of funds for banks to satisfy a temporary deficiency of funds?
  • 16. 
       16.   Which of the following is true?
    • A. 

      The primary credit lending rate is set by the president of the United States.

    • B. 

      The federal funds rate is set by the president of the United States.

    • C. 

      The primary credit lending rate is set by commercial banks.

    • D. 

      The primary credit lending rate is now set at a level above the federal funds rate.

    • E. 

      A and B

  • 17. 
     The Federal Reserve provides loans to banks in order to
    • A. 

      Resolve permanent shortages of funds experienced by banks.

    • B. 

      Resolve temporary shortages of funds experienced by banks.

    • C. 

      Finance the shortages of funds of finance companies.

    • D. 

      None of the above

  • 18. 
       18.   When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a
  • 19. 
     When banks need funding for just a few days, they would most likely
  • 20. 
     Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active.
    • A. 

      True

    • B. 

      False

  • 21. 
       21.   Subordinated notes and debentures are examples of
  • 22. 
       22.   All other things equal, when banks issue new stock, they
    • A. 

      Increase reported earnings per share.

    • B. 

      Decrease their ability to absorb operating losses.

    • C. 

      Dilute the ownership of the bank.

    • D. 

      A and B

  • 23. 
       23.   As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____.
    • A. 

      Time deposits and foreign deposits; savings deposits and short-term borrowings

    • B. 

      Savings deposits and short-term borrowings; foreign deposits and time deposits

    • C. 

      Savings and time deposits; foreign deposits and short-term borrowings

    • D. 

      Foreign deposits and short-term borrowings; savings and time deposits

  • 24. 
       24.   Cash held ____ represents the major portion of a bank's required reserves.
    • A. 

      At other commercial banks

    • B. 

      In a bank's vault

    • C. 

      On deposit at the federal funds window

    • D. 

      On deposit with the Board of Governors

  • 25. 
       25.   The main use of bank funds is for
  • 26. 
    Bank loans designed to support a firm's ongoing business operations are called
  • 27. 
     ____ loans are primarily used to finance the purchase of fixed assets.
  • 28. 
    Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when?
    • A. 

      Working capital loan

    • B. 

      Direct lease loan

    • C. 

      Term loan

    • D. 

      Informal line of credit

  • 29. 
       29.   A ____ loan may be especially appropriate when the bank wishes to avoid adding more debt to its balance sheet.
  • 30. 
       30.   The interest rate banks charge their most creditworthy customers is known as the
  • 31. 
    Transaction deposits do not include
  • 32. 
    When comparing Treasury securities and government agency securities
    • A. 

      Neither have default risk.

    • B. 

      The yield on Treasury securities is higher.

    • C. 

      Interest income on federal agency securities is exempt from state and local income taxes.

    • D. 

      Government agency securities are subject to default risk.

  • 33. 
    Money market deposit accounts (MMDAs)
    • A. 

      Require a maturity of 6 months or longer.

    • B. 

      Allow a limited number of checks to be written against the account.

    • C. 

      Pay a higher interest rate than CDs.

    • D. 

      None of the above

  • 34. 
       34.   Which of the following accounts does not allow checks (at least a limited amount) to be written?
    • A. 

      NOW accounts

    • B. 

      Money market deposit accounts (MMDAs)

    • C. 

      Retail CDs

    • D. 

      All of the above allow checks to be written

  • 35. 
    Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?
    • A. 

      MMDAs

    • B. 

      Federal funds

    • C. 

      The discount window

    • D. 

      Retail CDs

  • 36. 
       36.   The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company's own stock, and acquire other firms.
    • A. 

      True

    • B. 

      False

  • 37. 
     Like other market interest rates, the primary credit lending rate moves in reaction to changes in demand or supply of funds or both.
    • A. 

      True

    • B. 

      False

  • 38. 
    The yield on repurchase agreements is slightly higher than the federal funds rate at any given point in time.
    • A. 

      True

    • B. 

      False

  • 39. 
    Bank regulators are concerned that banks may maintain a higher level of capital than they should and have therefore imposed capital requirements on them.
    • A. 

      True

    • B. 

      False

  • 40. 
     In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds.
    • A. 

      True

    • B. 

      False

  • 41. 
    Bank rates on credit card balances are usually not very different from the rate charged on business loans.
    • A. 

      True

    • B. 

      False

  • 42. 
    While U.S. banks have expanded into non-U.S. markets, few non-U.S. banks have entered U.S. markets.
    • A. 

      True

    • B. 

      False

  • 43. 
     Which of the following statements is incorrect with respect to the federal funds market?
    • A. 

      It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions.

    • B. 

      Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them.

    • C. 

      The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed.

    • D. 

      All of the above are true with respect to the federal funds market.

  • 44. 
      ____ is (are) not a major source of funds for commercial banks.
  • 45. 
    The federal funds rate is typically ____ the primary credit lending rate.
  • 46. 
     ____ are the largest bank source of funds as a percentage of total liabilities.
  • 47. 
    ____ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month).
  • 48. 
     ____ loans are extended primarily to finance the purchase of fixed assets such as machinery.
  • 49. 
      Which of the following is not an off-balance sheet activity for commercial banks?
    • A. 

      Consumer loans

    • B. 

      Loan commitments

    • C. 

      Standby letters of credit

    • D. 

      Swaps contracts

  • 50. 
     A ____ is a type of loan commitment.
  • 51. 
     When a bank obtains funds through a ____, the provider of the funds receives collateral.
  • 52. 
    When banks obtain funds in the federal funds market, the providers of the funds are
  • 53. 
     A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____.
    • A. 

      Just a few days; one year or more

    • B. 

      Several weeks; one year or more

    • C. 

      Several weeks; just a few days

    • D. 

      Just a few days; just a few days

  • 54. 
    The interest rate charged on loans between depository institutions is commonly referred to as the
  • 55. 
    The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the
  • 56. 
    The primary credit lending rate is determined by
  • 57. 
      Bank capital represents funds obtained through ____ and through ____.
  • 58. 
     Banks sometimes prefer to minimize their amount of capital since
    • A. 

      Interest payments must be paid by the bank on all capital that is held.

    • B. 

      They try to avoid diluting ownership of the bank.

    • C. 

      A and B

    • D. 

      None of the above

  • 59. 
    When a bank obtains funds through ____, households are not a common provider of the funds.
  • 60. 
    Which of the following is not an off-balance sheet activity?
    • A. 

      Highly leveraged transactions (HLTs)

    • B. 

      Standby letters of credit

    • C. 

      Forward contracts

    • D. 

      Swap contracts

  • 61. 
     A bank's uses of funds represent liabilities of a bank.
    • A. 

      True

    • B. 

      False

  • 62. 
    Mutual funds that are willing to repurchase their shares from investors at any time are referred to as
  • 63. 
    Which of the following statements is incorrect?
    • A. 

      Mutual funds serve as a key financial intermediary.

    • B. 

      Managers of mutual funds do not analyze economic and industry trends.

    • C. 

      Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.

    • D. 

      Some mutual funds offer check-writing privileges.

  • 64. 
    No-load mutual funds are normally promoted by ____. Load funds are promoted by ____.
    • A. 

      Registered representatives of a brokerage firm; registered representatives of a brokerage firm

    • B. 

      Registered representatives of a brokerage firm; the mutual fund of concern

    • C. 

      The mutual fund of concern; registered representatives of a brokerage firm

    • D. 

      The mutual fund of concern; the mutual fund of concern

  • 65. 
     To cover managerial expenses, mutual funds typically charge
    • A. 

      Management fees of 1 to 2 percent of total assets per year.

    • B. 

      Commissions of typically 8 to 10 percent of transaction market value per year.

    • C. 

      Management fees of typically more than 10 percent of total assets per year.

    • D. 

      Commissions of typically 3 to 5 percent of the transaction market value per year.

  • 66. 
     Mutual funds that do not repurchase their shares from investors are
  • 67. 
     Most closed-end funds invest in
  • 68. 
    Exchange-traded funds are like open-end funds in the sense that
    • A. 

      Their shares are traded on an exchange, and their share price changes throughout the day.

    • B. 

      They have a fixed number of shares.

    • C. 

      They are not actively managed.

    • D. 

      None of the above

  • 69. 
    Hedge funds differ from open-end mutual funds in the sense that
    • A. 

      They require a much smaller initial investment.

    • B. 

      They are open to additional investments at any time.

    • C. 

      They do not accommodate investors who want to sell their shares back to the fund.

    • D. 

      They invest in very limited set of securities.

  • 70. 
     Investing in mutual funds is different from depositing money in a depository institution in that it represents partial ownership, whereas deposits represent a form of credit.
    • A. 

      True

    • B. 

      False

  • 71. 
    Mutual funds 
    • A. 

      Are unregulated. are required to disclose the names of their portfolio managers in the prospectus. must disclose their performance record over the past 20 years. are exempt from all taxes. are unregulated.

    • B. 

      Are required to disclose the names of their portfolio managers in the prospectus.

    • C. 

      Must disclose their performance record over the past 20 years.

    • D. 

      Are exempt from all taxes.

  • 72. 
    Which of the following is not disclosed in the prospectus?
    • A. 

      The minimum amount of investment required

    • B. 

      The investment objective of the funds

    • C. 

      The fees incurred by the mutual fund

    • D. 

      All of the above are disclosed

  • 73. 
    The net asset value of a mutual fund is estimated once every week.
    • A. 

      True

    • B. 

      False

  • 74. 
     Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.
  • 75. 
    A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
    • A. 

      True

    • B. 

      False

  • 76. 
    Money market funds invest mostly in
  • 77. 
     If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called
  • 78. 
     Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called
  • 79. 
     Mutual funds composed of bonds that offer periodic coupon payments are
  • 80. 
    Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations.
  • 81. 
    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.)
  • 82. 
    Mutual funds that include some non-U.S. stocks and U.S. stocks are called ____ funds.
  • 83. 
     A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.
  • 84. 
      The majority of mutual fund assets are in the form of
  • 85. 
     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.
  • 86. 
    When the redemptions of money market mutual fund shares exceeds sales of shares, the fund accommodates the amount of excessive redemptions by
    • A. 

      Selling some of the assets contained in the portfolio.

    • B. 

      Issuing stock.

    • C. 

      Issuing bonds.

    • D. 

      Borrowing from banks.

  • 87. 
     Money market fund assets are dominated by
  • 88. 
    If money market funds definitely expect interest rates to increase, they will ____ their average asset maturity.
  • 89. 
     Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.
  • 90. 
     Equity real estate investment trusts invest
    • A. 

      In mortgage and construction loans.

    • B. 

      Directly in properties.

    • C. 

      In common stocks issued by construction companies.

    • D. 

      In common stocks issued by real estate brokerage firms.

  • 91. 
    Because ____ real estate investment trusts essentially represent a fixed income portfolio, their market value will ____ as interest rates increase.
  • 92. 
     When interest rates decline, investors who want to earn a high return may tend to ____ in stock mutual funds, and ____ deposits in depository institutions.
  • 93. 
    The composition of asset allocation funds
    • A. 

      Is focused completely on one type of security as specified by the particular mutual fund.

    • B. 

      Is fixed and not altered by the mutual fund managers.

    • C. 

      A and B

    • D. 

      None of the above

  • 94. 
    A mutual fund prospectus does not contain
    • A. 

      Minimum amount of investment required.

    • B. 

      Return on the fund since its inception.

    • C. 

      Investment objective of the mutual fund.

    • D. 

      Exposure of the mutual fund to various types of risk.

    • E. 

      Fees incurred by the mutual fund.

  • 95. 
    The ____ of a mutual fund indicates the value per share.
  • 96. 
    Mutual funds whose funds are promoted strictly by the mutual fund of concern are called
  • 97. 
    Mutual funds that are composed of bonds that offer periodic coupon payments and vary in exposure to risk are called ____ mutual funds.
  • 98. 
    ____ are most likely to invest in mortgages.
  • 99. 
    Hedge funds that exceed a specified size must register with the
  • 100. 
    According to SEC regulations, the majority of the members on a mutual fund's board of directors must be
  • 101. 
    An expense ratio represents ____ divided by the fund's ____.
    • A. 

      Annual fees charged to investors; 12b-1 fees

    • B. 

      Annual fees charged to investors; net asset value

    • C. 

      Initial sales charge (load); 12b-1 fees

    • D. 

      Initial sales charge (load); net asset value

  • 102. 
     Most closed-end funds invest in
  • 103. 
      ____ are the most popular mutual funds when measures according to total assets.
  • 104. 
    When the demand for a particular closed-end fund is ____, the fund is likely priced at a ____.
    • A. 

      High; discount

    • B. 

      Low; discount

    • C. 

      High; premium

    • D. 

      B and C are correct

  • 105. 
     Which of the following statements is incorrect?
    • A. 

      Commercial paper is the largest component in money market funds.

    • B. 

      From an investor's perspective, money market funds usually have a low level of credit risk.

    • C. 

      If managers are unable to change the asset composition of money market funds, they can still influence performance by changing the maturities of the securities in which they invest.

    • D. 

      If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities to purchase new securities with shorter maturities.

  • 106. 
       45.   The number of exchange-traded funds has declined over the last several years because the cost of managing them was excessive.
    • A. 

      True

    • B. 

      False

  • 107. 
    Exchange-traded funds can be purchased on margin.
    • A. 

      True

    • B. 

      False

  • 108. 
    Exchange-traded funds can be shorted.
    • A. 

      True

    • B. 

      False

  • 109. 
    Mutual fund managers seek securities that have much liquidity so that they could easily sell them in the secondary market at any time.
    • A. 

      True

    • B. 

      False

  • 110. 
    Closed-end funds are closed to new investment but allow redemptions by shareholders.
    • A. 

      True

    • B. 

      False

  • 111. 
     Closed-end fund managers must hold more cash than mutual fund managers.
    • A. 

      True

    • B. 

      False

  • 112. 
     Index mutual funds are not traded throughout the day, while exchange-traded funds are.
    • A. 

      True

    • B. 

      False

  • 113. 
     Venture capital funds commonly invest in stocks of publicly-traded companies.
    • A. 

      True

    • B. 

      False

  • 114. 
     Many businesses that go public are partially backed by venture capital before the IPO.
    • A. 

      True

    • B. 

      False

  • 115. 
     Private equity funds use most of their money to invest in stocks of publicly-traded companies.
    • A. 

      True

    • B. 

      False

  • 116. 
    Vulture funds are a type of private equity fund that purchase distressed assets of a firm that is in or near bankruptcy.
    • A. 

      True

    • B. 

      False

  • 117. 
    Hedge funds commonly engage in short selling.
    • A. 

      True

    • B. 

      False

  • 118. 
     ____ are not exchange-traded funds.
  • 119. 
     Which of the following statements is incorrect?
    • A. 

      ETFs are like index mutual funds because the share price adjusts over time in response to the change in the index level.

    • B. 

      Both ETFs and index mutual funds pay dividends in the form of additional shares to investors.

    • C. 

      The portfolio management of both ETFs and index mutual funds is very complex.

    • D. 

      ETFs can be traded throughout the day.

  • 120. 
    Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as
  • 121. 
     ____ trade at one-tenth the S&P 500 value.
  • 122. 
    Exchange traded funds can be
    • A. 

      Traded throughout the day.

    • B. 

      Purchased on margin.

    • C. 

      Sold short.

    • D. 

      All of the above

  • 123. 
     Mutual funds must register with the U.S. Treasury and provide to interested investors a prospectus that discloses details about the components of the funds and risks involved.
    • A. 

      True

    • B. 

      False

  • 124. 
    The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.
    • A. 

      True

    • B. 

      False

  • 125. 
     Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors.
    • A. 

      True

    • B. 

      False

  • 126. 
    The expenses incurred by a mutual fund are billed separately to investors, and are not included in the fund's net asset value (NAV).
    • A. 

      True

    • B. 

      False

  • 127. 
     A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
    • A. 

      True

    • B. 

      False

  • 128. 
    Large mutual funds can exert some control over the management of firms because they commonly represent the largest shareholders.
    • A. 

      True

    • B. 

      False

  • 129. 
    Investors who feel capable of making their own investment decisions often prefer to invest in load funds.
    • A. 

      True

    • B. 

      False

  • 130. 
    The term "mutual funds" is normally used to represent open-end funds, and does not include closed end funds.
    • A. 

      True

    • B. 

      False

  • 131. 
    Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of every day.
    • A. 

      True

    • B. 

      False

  • 132. 
    Capital appreciation funds are suited for investors who are more willing to risk a possible loss in value.
    • A. 

      True

    • B. 

      False

  • 133. 
    The returns on international stock mutual funds are affected only by foreign companies' stock prices, and are independent of currency movements.
    • A. 

      True

    • B. 

      False

  • 134. 
     Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform indexes.
    • A. 

      True

    • B. 

      False

  • 135. 
     A mutual fund's performance is usually unrelated to market conditions.
    • A. 

      True

    • B. 

      False

  • 136. 
    The SEC requires that a majority of the directors of a mutual fund board be independent (not employed by the fund).
    • A. 

      True

    • B. 

      False

  • 137. 
    Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall investment.
    • A. 

      True

    • B. 

      False

  • 138. 
    Late trading of mutual funds involves engaging in a trade on prices that are stale or no longer appropriate.
    • A. 

      True

    • B. 

      False

  • 139. 
     Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates.
    • A. 

      True

    • B. 

      False

  • 140. 
    Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with inflation.
    • A. 

      True

    • B. 

      False

  • 141. 
    Equity REITs essentially represent fixed-income portfolios. Thus, their market values will be influenced by interest rate movements.
    • A. 

      True

    • B. 

      False

  • 142. 
    Hedge funds are more heavily regulated than mutual funds.
    • A. 

      True

    • B. 

      False

  • 143. 
    Which of the following is not true regarding mutual funds?
    • A. 

      They are a key financial intermediary.

    • B. 

      They provide an important service to individual investors seeking to invest funds.

    • C. 

      Most mutual funds use experienced portfolio managers, so investors do not have to manage the portfolio themselves.

    • D. 

      They provide a way for individual investors to diversify, but most individual investors are unable to afford the purchase of mutual fund shares.

    • E. 

      They may offer various services, such as checkwriting privileges.

  • 144. 
     Which of the following statements is incorrect?
    • A. 

      Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and are traded on a stock exchange.

    • B. 

      Unlike a closed-end fund, an ETF has a fixed number of shares.

    • C. 

      ETFs differ from most open-end and closed-end funds in that they are not actively managed.

    • D. 

      One disadvantage of ETFs is that each purchase of additional shares must be done through the exchange where they are traded.

  • 145. 
     A mutual fund prospectus does not contain the
    • A. 

      Minimum amount of investment required.

    • B. 

      Investment objective of the mutual fund.

    • C. 

      Exposure of the mutual fund to various types of risk.

    • D. 

      Return on the fund since its inception.

    • E. 

      Fees incurred by the mutual fund.

  • 146. 
    The ____ of a mutual fund indicates the value per share.
  • 147. 
    Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.
  • 148. 
      ____ are most likely to invest in mortgages.
  • 149. 
    Mutual funds are not required to disclose which of the following in the prospectus?
    • A. 

      The names of the portfolio managers

    • B. 

      The length of time that the portfolio managers have been employed by the fund in that position

    • C. 

      The performance record over the past 10 years in comparison to a broad market index

    • D. 

      The number of investors currently investing in the mutual fund

    • E. 

      Mutual funds are required to disclose all of the above in a prospectus.

  • 150. 
    Which of the following is not a way in which mutual funds generate returns for their shareholders?
    • A. 

      They can pass on any earned income as dividend payments to shareholders.

    • B. 

      They distribute the capital gains resulting from the sale of securities within the fund.

    • C. 

      The mutual fund price appreciates.

    • D. 

      All of the above are ways in which a mutual fund generates returns to its shareholders.

  • 151. 
    A(n) ____ mutual fund contains a sales charge.
  • 152. 
     ____ funds are open to investment from investors at any time.
  • 153. 
    Which of the following statements is incorrect?
    • A. 

      Investors can purchase shares directly from an open-end fund at any time.

    • B. 

      The number of shares of an open-end fund is always changing.

    • C. 

      Open-end funds typically maintain some cash on hand in case investments exceed redemptions.

    • D. 

      There are many different categories of open-end mutual funds.

  • 154. 
    ____ funds focus on a group of companies sharing a particular characteristic.
  • 155. 
    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.
  • 156. 
    Which of the following statements is incorrect?
    • A. 

      A mutual fund is usually run by an investment company.

    • B. 

      Although many mutual funds have grown substantially over time, their expense ratios have generally increased over time.

    • C. 

      For each mutual fund, all expenses charged and reflected in the expense ratio are always valid.

    • D. 

      The SEC requires that a majority of the directors of a mutual fund board be independent.

  • 157. 
    Money market funds in the aggregate invest primarily in
  • 158. 
    Which of the following is not true with respect to venture capital funds?
    • A. 

      They typically invest in young, growing firms that need equity funding but are not ready or willing to go public.

    • B. 

      More than half of all VC investing is in businesses that are being created.

    • C. 

      Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail.

    • D. 

      All of the above are correct with respect to venture capital funds.

  • 159. 
    Which of the following is not a reason the expected returns on money market funds (MMFs) are low relative to bonds or stocks?
    • A. 

      The credit risk of MMFs is normally perceived to be lower than that of corporate bonds.

    • B. 

      MMFs have higher interest rate risk than bond funds.

    • C. 

      MMFs consistently generate positive returns over time, whereas bond and stock funds can experience negative returns.

    • D. 

      All of the above are reasons the returns on MMFs are low relative to bonds or stocks.

  • 160. 
     ____ funds sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securities.
  • 161. 
     Which of the following statements is incorrect?
    • A. 

      Insurance provides a payment to the insured under conditions specified by the insurance policy contract.

    • B. 

      Individuals who are less exposed to specific conditions that cause financial damage are more likely to purchase insurance against those conditions.

    • C. 

      Insurance can cause the insured to take more risks because they are protected.

    • D. 

      Insurance companies employ underwriters to calculate the risk of specific insurance policies.

  • 162. 
    The insurance premium is ____ related to the uncertainty about the size of the payments; the premium is also ____ for group plans.
  • 163. 
     Those insurance companies whose claims are ____ predictable need to maintain ____ liquidity.
  • 164. 
    A ____ life insurance company is owned by its policyholders; most life insurance companies are ____.
  • 165. 
    A life insurance policy that protects the policyholder until death, or as long as premiums are promptly paid is a
  • 166. 
    ____ insurance provides insurance for a policyholder only over a specified period.
  • 167. 
    Which type of life insurance policy does not build a cash value for policyholders?
  • 168. 
    Which type of life insurance policy specifically accommodates the needs of people who need more insurance now than later?
  • 169. 
    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?
  • 170. 
    Which type of life insurance policy can offer flexibility on the size and timing of premium payments? (The policyholder can decide the size of payments each period.)
  • 171. 
    Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy.
  • 172. 
    ____ is not a typical source of funds to life insurance companies.
  • 173. 
    ____ represent the most popular asset of life insurance companies.
  • 174. 
    Which of the following is the least common use of funds by life insurance companies?
    • A. 

      Government securities

    • B. 

      Corporate bonds

    • C. 

      Stocks

    • D. 

      Real estate

  • 175. 
    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?
    • A. 

      Liquidity ratios

    • B. 

      Operating expense ratios

    • C. 

      Profitability ratios

    • D. 

      All of the above are used by regulators

  • 176. 
       16.   The ratio of an insurance company's net profit to policyholders' surplus is called
  • 177. 
    Because life insurance companies carry a large amount of ____ securities, the market value of their asset portfolio can be ____ to interest rate fluctuations.
  • 178. 
    Life insurance companies can attempt to reduce their exposure to interest rate risk by
    • A. 

      Increasing their proportion of long-term assets.

    • B. 

      Diversifying the age distribution of their customer base.

    • C. 

      Increasing their proportion of short-term assets.

    • D. 

      Concentrating on an older age distribution of their customer base.

  • 179. 
     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.

  • 180. 
       20.   The most common use of funds for property and casualty insurance companies is
  • 181. 
      Which of the following is not a difference between PC insurance and life insurance?
    • A. 

      PC policies often last ten years or more, as opposed to the short-term life insurance policies.

    • B. 

      PC insurance encompasses a wide variety of activities, while life insurance is more focused.

    • C. 

      Forecasting the amount of future compensation to be paid is more difficult for PC insurance than for life insurance.

    • D. 

      All of the above are differences between PC insurance and life insurance.

  • 182. 
    ____ effectively reallocates a portion of an insurance company's return and risk to other insurance companies.
  • 183. 
    Individuals who are insured under a managed health care plan can usually choose any provider of health care services.
    • A. 

      True

    • B. 

      False

  • 184. 
    ____ usually require individuals to choose a primary care physician.
  • 185. 
    ____ insurance covers losses due to dishonest employees.
  • 186. 
    ____ insurance covers losses due to lawsuits by dissatisfied customers.
  • 187. 
      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.

  • 188. 
    All regulation of insurance companies is performed by
  • 189. 
    In a(n) ____ insurance policy, the benefits awarded by the life insurance company to the beneficiary differ, depending on the assets backing the policy.
  • 190. 
    The most common type of mortgage held by life insurance companies are ____ mortgages.
  • 191. 
    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

  • 192. 
    Life insurance companies can reduce their exposure to ____ risk by diversifying the age distribution of their customer base.
  • 193. 
    Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans.
  • 194. 
      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.
  • 195. 
    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.
  • 196. 
     There are more defined ____ pension plans; there are more participants in defined ____ plans.
  • 197. 
     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.
    • A. 

      Matched funding; matched funding

    • B. 

      Projective funding; matched funding

    • C. 

      Projective funding; projective funding

    • D. 

      Matched funding; projective funding

  • 198. 
    Pension funds managed by life insurance companies are normally referred to as
  • 199. 
    Pension portfolios managed by trusts are expected to offer ____ returns than those managed by insurance companies and have a(n) ____ degree of risk.
  • 200. 
     The asset composition of private pension portfolios is most heavily concentrated in
  • 201. 
     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.
  • 202. 
     Pension funds managed by life insurance companies concentrate on
  • 203. 
    Pension portfolios managed by trusts concentrate on
  • 204. 
    To reduce interest rate risk, pension fund managers can
    • A. 

      Shift from variable-rate to fixed-rate bonds.

    • B. 

      Increase the average maturity on fixed-rate bonds.

    • C. 

      Decrease the average maturity on fixed-rate bonds.

    • D. 

      Reduce the investment in money market securities.

  • 205. 
    Most pension fund contributions are contributed by the
  • 206. 
       46.   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

  • 207. 
       47.   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

  • 208. 
       48.   Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
    • A. 

      True

    • B. 

      False

  • 209. 
       49.   Group insurance policies are very popular for employers and employees.
    • A. 

      True

    • B. 

      False

  • 210. 
       50.   Real estate values are very stable over time and usually have little impact on the market value of a life insurance company's asset portfolio.
    • A. 

      True

    • B. 

      False

  • 211. 
       51.   Property and casualty insurance and life insurance have very similar characteristics.
    • A. 

      True

    • B. 

      False

  • 212. 
       52.   Public pension funds can be classified by the manner in which contributions are received and benefits are paid.
    • A. 

      True

    • B. 

      False

  • 213. 
       53.   A defined-benefit plan provides benefits that are determined by the accumulated contributions and the fund's investment performance.
    • A. 

      True

    • B. 

      False

  • 214. 
       54.   In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans. 
    • A. 

      True

    • B. 

      False

  • 215. 
       55.   Projective funding limits the manager's discretion, allowing only investments that match future payouts.
    • A. 

      True

    • B. 

      False

  • 216. 
       56.   Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved.
    • A. 

      True

    • B. 

      False

  • 217. 
       57.   The composition of the stocks in a pension fund's portfolio is determined by the fund's portfolio managers.
    • A. 

      True

    • B. 

      False

  • 218. 
       58.   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

  • 219. 
     ____ insurance protects the policyholders until death or as long as premiums are promptly paid.
  • 220. 
    ____ life insurance specifies a period of time over which the policy will exist but also builds a cash value for policyholders over time.
  • 221. 
       The primary source of life insurance company income is a result of
  • 222. 
    Property and casualty (PC) insurance differs from life insurance in all of the following ways, except
    • A. 

      PC policies often last one year or less, as opposed to the long-term or even permanent life insurance policies.

    • B. 

      PC insurance is more focused than life insurance.

    • C. 

      The amount of future compensation to be paid on PC insurance is more difficult to forecast than that paid on life insurance.

    • D. 

      All of the above are differences between PC and life insurance.

  • 223. 
      With a(n) ____ plan, contributions are dictated by the benefits that will eventually be provided.
  • 224. 
    In a ____ strategy, investment decisions are made with the objective of generating cash flows that match planned outflow payments.
  • 225. 
     Pension portfolios managed by trusts offer potentially ____ returns than insured plans and have a ____ degree of risk.
  • 226. 
     If a pension fund holds long-term, fixed-rate bonds, the market value of the portfolio will ____ during periods when interest rates ____.
  • 227. 
       A pension fund's bond portfolio is not directly affected by
    • A. 

      General stock market conditions.

    • B. 

      Changes in the risk-free rate.

    • C. 

      Changes in the risk premium.

    • D. 

      All of the above are factors affecting the performance of a pension fund's bond portfolio.

  • 228. 
     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 ____.
  • 229. 
    Pension funds commonly engage in interest rate swaps to hedge the exposure of their bond and mortgage portfolios to ____ risk.
  • 230. 
         1.   Which of the following is not a service that is commonly performed by an securities firm?
    • A. 

      Commercial banking

    • B. 

      Origination

    • C. 

      Underwriting

    • D. 

      Distribution

  • 231. 
      Securities firms focus on ____ market services; brokerage firms focus on ____ market services.
  • 232. 
     The ____ regulates the issuance of securities.
  • 233. 
    All information relevant to the security, as well as the agreement between the issuer and the securities firm, must be provided in the
  • 234. 
         5.   Stock offerings are normally based on a firm commitment, whereby the securities firm does not guarantee a price to the issuing corporation.
    • A. 

      True

    • B. 

      False

  • 235. 
     Research indicates that securities firms tend to
  • 236. 
    The ____ determines margin requirements on securities purchased.
  • 237. 
    The ____ can liquidate failing brokerage firms.
  • 238. 
      A(n) ____ discloses relevant financial data on a firm issuing securities, and the provisions applicable to the security.
  • 239. 
       14.   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

  • 240. 
      Flotation costs as a percentage of the value of securities issued are ____ for ____ issues.
  • 241. 
       Competitive bidding by securities firms for underwriting the issue of new bonds is primarily used for
  • 242. 
    .   ____ is motivated by the perception that the sum of the parts is sometimes greater than the whole.
  • 243. 
    Investors sell a security short when they expect the price of the security to
  • 244. 
       34.   Which of the following is not an SEC rule?
    • A. 

      Analysts of securities firms underwriting an IPO cannot promote new stock for the first 40 days after the IPO.

    • B. 

      An analyst's compensation should be directly aligned with the amount of business that the analyst brings to the securities firm.

    • C. 

      Analysts cannot be supervised by the securities department within the securities firm.

    • D. 

      An analyst's rating must divulge any recent securities business provided by the securities firm that assigned the rating.

  • 245. 
       38.   As a result of the Financial Services Modernization Act
    • A. 

      Securities firms had to search for loopholes to expand into other types of financial services.

    • B. 

      Firms that formed a special finance holding company were regulated by the SEC.

    • C. 

      Banking, securities activities, and insurance services could be consolidated in a single financial institution.

    • D. 

      Securities firms were prohibited from expanding into other types of financial services.