Chapter 13 – Financial Industry Structure
60. A person who discovers that he/she has advanced stages of cancer and calls his/her life
insurance agent to double his/her insurance policy is an example of:
D. Risk spreading
61. A homeowner discovers that a large tree in his yard is diseased and may fall in a bad
windstorm and if it falls, it will likely destroy the garage. The cost to have the tree cut down is
significant but the homeowner has an insurance policy and figures that if the tree falls and
destroys the garage, the insurance company will pay, and the deductible is less than the cost to
have the tree removed. This is an example of:
A. Information symmetry
62. One way insurance companies deal with the problem of adverse selection is by:
D. Spreading the risk in the same geographic area
Chapter 13 – Financial Industry Structure
63. In many cases, life insurance companies will require applicants to take a physical. This is
done to avoid the problem of:
D. Transaction costs
64. Many health insurers require a deductible where the policyholder pays the first part of any
loss. The use of a deductible most directly treats the problem of:
A. Information symmetry
65. An insurance company provides liability insurance to a restaurant protecting the owner
against claims from customers. One area of coverage is protections against food poisoning
claims. The insurance company may periodically send an employee into the restaurant to
observe food preparation and food storage processes. The insurance company is trying to
avoid:
D. Transaction costs
Chapter 13 – Financial Industry Structure
66. The use of coinsurance clauses and deductibles is an attempt by insurance companies to
deal with the problem of:
A. Non-payment of premiums
67. Reinsurance is used by insurance companies faced with:
D. The problem of moral hazard
68. The reinsurance market is characterized as having:
A. A few buyers and many sellers
Chapter 13 – Financial Industry Structure
69. Catastrophe bonds or “cat bonds” were developed:
D. By the U.S. government to provide insurance against national disasters
70. Pension funds resemble life insurance companies in the sense that:
A. The payoff occurs only occurs when a person dies
71. Pension funds resemble insurance companies by:
A. Pooling the savings of only large investors
Chapter 13 – Financial Industry Structure
72. In most companies, an employee must work for a number of years before qualifying for
pension benefits. This process is referred to as:
D. Mandatory benefit pending
73. Vesting can make job changes costly because:
D. Vested employees earn higher returns on their funds
74. Defined-benefit plans:
A. Are more common than defined contribution plans
Chapter 13 – Financial Industry Structure
75. In a defined-contribution plan:
D. No vesting is required; employees are eligible for benefits from the time they make their
first contribution
76. Pension plans can be thought of as the opposite of life insurance because life insurance:
A. Costs far more than pension plans
D. They are both vehicles for saving
Chapter 13 – Financial Industry Structure
78. The spate of pension plan failures and investment setbacks in the financial crisis of 2007-
2009 doubled the Pension Benefit Guaranty Corporation’s (PBGC) deficit to:
A. $10 billion
79. The Social Security System in the U.S. is best described as a:
A. Defined benefits plan
80. With the U.S. Social Security System, the risk of funding the system rests on:
D. The Social Security Administration
Chapter 13 – Financial Industry Structure
81. The category of financial intermediaries called securities firms includes each of the
following, except:
A. Mutual funds
82. The practice of “placing the issue” is conducted by:
D. Commercial banks
83. The main risk that investment banks face from their underwriting services is:
Chapter 13 – Financial Industry Structure
84. Which of the following is not true about the information and advice investment bankers
provide to clients?
D. It helps improves the allocation of resources across the economy
85. Finance companies perform all of the following functions, except:
D. Lease equipment to firms
86. Accounts receivables loans provided by finance companies provide firms with:
A. Start-up capital
Chapter 13 – Financial Industry Structure
87. Most finance companies specialize in one of three loan types. Which of the following is
not one of those three types?
D. Business loans for firms to use to buy new equipment
88. A business needs a loan to help keep its shelves stocked. This is an example of:
D. Consumer finance
D. One deals with equipment leasing and the other does not
Chapter 13 – Financial Industry Structure
90. Congress chartered Sallie Mae to make loans to:
A. Homeowners
91. Fannie Mae, Ginnie Mae, and Freddie Mac are examples of:
D. Government-sponsored enterprises that provide homeowners insurance to people who
cannot obtain it from private insurers
92. Government-sponsored enterprises like Fannie Mae and Freddie Mac usually borrow at
interest rates:
D. That are slightly below the federal funds rate
Chapter 13 – Financial Industry Structure
93. Fannie Mae, Freddie Mac, and similar government-sponsored enterprises obtain their
funds from:
A. The U.S. Treasury
94. In 2008, as a result of a run on government-sponsored enterprise debt, the U.S. Treasury
placed Fannie Mae and Freddie Mac in:
D. restriction
95. Hedge funds:
D. Employ diversification techniques called “hedging.”
Chapter 13 – Financial Industry Structure
96. Hedge funds can be described as:
A. Low risk
Short Answer Questions
97. Why does the United States have more banks that most other highly industrialized
countries?
98. Why did it take almost 100 years before the United States had its own national currency?
Chapter 13 – Financial Industry Structure
99. What does it mean to say the United States has a dual banking system?
100. What is the source of regulatory competition in banking? Discuss how the focus of this
competition has changed over time.