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. free riding.
b. adverse selection.
c. people going uninsured.
d. moral hazard.
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:
a. free riding.
b. moral hazard.
c. adverse selection.
d. transaction costs.
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.
b. adverse selection.
c. insufficient government regulation.
d. moral hazard.
67. Reinsurance is used by insurance companies faced with:
a. the prospects of a large but diversified risk.
b. inadequate capital to handle a potential loss.
c. insolvency.
d. the problem of moral hazard.
68. The reinsurance market is characterized as having:
a. a few buyers and many sellers.
b. many buyers and sellers.
c. few buyers and sellers.
d. many buyers and a few sellers.
69. Catastrophe bonds or “cat bonds” were developed:
a. by reinsurance companies to finance their growth.
b. as an alternative to purchasing reinsurance.
c. prior to the creation of reinsurance companies but are being phased out.
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.
b. they accept deposits.
c. they offer the ability to make premium payments today in return for a promised payment
under specified future circumstances.
d. they both are better investments the longer you live.
71. Pension funds resemble insurance companies by:
a. pooling the savings of only large investors.
b. accepting deposits.
c. spreading risk.
d. becoming better investments the longer you live.
72. In most companies, an employee must work for a number of years before qualifying
for pension benefits. This process is referred to as:
a. a defined-benefit period.
b. vesting.
c. regulated contribution period.
d. mandatory benefit pending.
73. Vesting can make job changes costly because:
a. you may not be able to take your entire pension benefit from your previous job with you.
b. once you leave one job fully vested the only other pension you can be eligible for is Social
Security.
c. you can only become fully vested in one company‘s pension.
d. vested employees earn higher returns on their funds.
74. Defined-benefit plans:
a. are more common than defined contribution plans.
b. pay a pension based on the amount contributed into the plan by the employee and
employer.
c. do not require any responsibility on the part of the employer for the employees’ retirement
income; it is based on employee contributions.
d. usually require an employee to work a very long time for the same employer in order to
reap a large benefit.
75. In a defined-contribution plan:
a. only the employee makes contributions into the fund.
b. the retirement benefits will vary with both the amount contributed and the performance of
the fund.
c. the benefits are determined mainly by years of service.
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.
b. companies spread risk while pension plans are only spread within the company.
c. pays off when you die while the pension plan pays off if you don’t.
d. pools the savings of many and pension plans do not.
77. Which of the following statements is false?
a. Pension plans and life insurance are often both offered by the same institution.
b. Life insurance companies hold more in stocks than pension funds do.
c. Life insurance pays off when you die while the pension plan pays off if you don’t.
d. They are both vehicles for saving.
78. The Social Security System in the U.S. is best described as a:
a. defined benefits plan.
b. defined contribution plan.
c. employer funded plan.
d. pay–as-you-go system.
79. With the U.S. Social Security System, the burden of funding the system rests on:
a. the current workers.
b. the retirees.
c. the federal government.
d. the Social Security Administration.
80. The category of financial intermediaries called securities firms includes each of the
following, except:
a. mutual funds.
b. brokerages.
c. investment banks.
d. credit unions.
81. The practice of “placing the issue” is conducted by:
a. the underwriting services of investment banks.
b. mutual fund companies.
c. brokerage firms.
d. commercial banks.
82. The main risk that investment banks face from their underwriting services is:
a. the client will not pay for the service.
b. the company issuing the securities will go bankrupt.
c. the price investors pay for the security is less than the guaranteed price to the issuing firm.
d. the price paid by investors exceeds the guaranteed price to the issuing firm.
83. Which of the following is not true about the information and advice investment bankers
provide to clients?
a. It is public information that the bank compiles and makes available to anyone.
b. It is highly valued if the fees paid for it are any indication of its value.
c. It is often used to identify possible acquisition and merger candidates.
d. It helps improve the allocation of resources across the economy.
84. Finance companies perform all of the following functions, except:
a. issue commercial paper and securities.
b. take deposits.
c. make loans.
d. lease equipment to firms.
85. Accounts receivable loans provided by finance companies provide firms with:
a. start-up capital.
b. the ability to turn a liability into an asset.
c. the ability to turn a relatively illiquid asset into liquidity.
d. inventory loans.
86. Most finance companies specialize in one of three loan types. Which of the following is
not one of those three types?
a. Consumer loans for purchases such as appliances
b. Margin loans for buying stock
c. Sales loans for purchases such as cars
d. Business loans for firms to use to buy new equipment
87. A business needs a loan to help keep its shelves stocked. This is an example of:
a. an inventory loan.
b. sales finance.
c. equipment leasing.
d. consumer finance.
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88. The main difference between sales finance and consumer finance is:
a. the type of borrower.
b. the size of the purchase involved.
c. the length of time until the loan has to be repaid.
d. one deals with equipment leasing and the other does not.
89. Congress chartered Sallie Mae to make loans to:
a. homeowners.
b. customers of securities
brokers. c. small business
owners.
d. students.
90. Fannie Mae, Ginnie Mae, and Freddie Mac are examples of:
a. private regulatory bodies that supervise home mortgage lenders.
b. government-sponsored enterprises chartered to encourage home lending.
c. government-sponsored enterprises that were chartered to encourage small business
loans. d. government-sponsored enterprises that provide homeowners insurance to people
that cannot obtain it from private insurers.
91. Government-sponsored enterprises like Fannie Mae and Freddie Mac usually borrow
at interest rates:
a. below what private lenders pay.
b. exceeding what private lenders pay.
c. that are the same as private lenders since they are really a private
lender. d. that are slightly below the federal funds rate.
92. Fannie Mae, Freddie Mac, and similar government-sponsored enterprises obtain
their funds from:
a. the U.S. Treasury.
b. the Federal Reserve.
c. issuing commercial paper and bonds.
d. both the U.S. Treasury and the Federal Reserve.
93. In 2008, as a result of a run on government-sponsored enterprise debt, the U.S.
Treasury placed Fannie Mae and Freddie Mac in:
a. conservatorship.
b. receivership.
c. bankruptcy.
d. trusteeship.
94. Hedge funds:
a. are strictly for millionaires.
b. are heavily regulated.
c. issue commercial paper and bonds.
d. always employ diversification techniques called “hedging.”
95. Hedge funds can be described as:
a. low risk.
b. moderate risk.
c. very high risk.
d. only as risky as the entire stock market as measured by an index such as the S&P 500.
96. The Volcker rule in the Dodd-Frank Act does which of the following?
a. Creates a host of new agencies to streamline the regulatory process
b. Increases oversight of specific institutions regarded as a systemic risk
c. Introduces significant regulation of hedge funds
d. Forbids insured depositories from proprietary trading
97. The Dodd-Frank does all of the following except:
a. sets out new rules for financial institutions and markets.
b. repeals the Glass-Steagall Act of 1933.
c. requires closer government oversight over key establishments called systemically
important financial institutions.
d. sharply alters the authorities of the government agencies that govern the
financial sector.