Economics of Money, Banking, and Financial Markets, 11e (Mishkin)
Web Chapter 3: Nonbank Finance
1) The regulatory agency responsible for regulating the activities of life insurance companies is
A) the FDIC.
B) the Fed.
C) the FHLBS.
D) the appropriate state agency where the company is operating.
2) Which of the following is true of life insurance companies?
A) Typically the type of assets that life insurance companies hold are corporate bonds,
commercial mortgages, and corporate stock.
B) The two typical forms of life insurance polices that are held can be classified as whole and
variable life policies.
C) The major risk that life insurance companies face is that payouts to policy holders are very
hard to predict.
D) Life insurance companies have suffered from wide spread failures.
3) Life insurance companies are regulated by state governments because
A) they have never experienced bankruptcy.
B) they have never experienced profitability.
C) they have never experienced widespread failures.
D) they hold only highly liquid assets.
4) The life insurance industry’s share of total financial intermediary assets fell from 15.3% at the
end of 1970 to 11.5% at the end of 1980 because of
A) poor investment returns in the 1970s.
B) widespread failures of life insurance companies.
C) federal regulations limiting the sale of life insurance.
D) unpredictability of payouts.
5) An example of permanent insurance is ________ insurance, and an example of temporary
insurance is ________ insurance.
A) term; variable life
B) whole life; variable life
C) whole life; term
D) term; whole life
6) A contract requiring payment of an annual premium in exchange for the payment of a future
stream of payments beginning at a specified age and continuing until death is
A) whole life insurance.
B) an annuity.
C) term life insurance.
D) variable life insurance.
E) universal life insurance.
7) The key factor causing life insurance companies to move into the management of pension
funds was
A) the investment expertise of insurance companies.
B) a request for this change by managers of pension funds.
C) a change in state laws.
D) a change in federal legislation in 1974 to encourage pension funds to turn fund management
over to life insurance companies.
8) Property and casualty insurance companies hold the largest share of their assets in
A) long-term government bonds.
B) short-term government securities and commercial paper.
C) tax-exempt municipal bonds and U.S. government securities.
D) medium-term corporate bonds.
9) Property and casualty insurance companies are organized
A) both as stock and mutual companies.
B) only as stock companies.
C) only as mutual companies.
D) primarily as cooperatives.
10) Relative to life insurance companies, property and casualty insurance companies hold
A) more liquid assets.
B) more long-term government bonds.
C) more commercial mortgages.
D) fewer municipal bonds.
11) Reinsurance allows ________ to reduce the risks of exposure by allocating a portion of the
risk to ________ in exchange for a portion of the premium.
A) insurance companies; another insurance company
B) insurance companies; the insured
C) the insured; the insurance company
D) the insured; a bank
12) Insurance companies reduce risk exposure in exchange for a portion of their insurance
premiums by obtaining
A) government loan guarantees.
B) federal insurance.
C) reinsurance.
D) bankers acceptances.
13) The specialty of Lloyd’s of London is
A) annuities.
B) hedge funds.
C) mutual funds.
D) reinsurance.
14) In recent years, bank regulatory authorities have
A) encouraged banks to enter the insurance field.
B) discouraged banks from entering the insurance field.
C) asked Congress to write new legislation that would make it illegal for banks to enter the
insurance field.
D) asked Congress to write new legislation that would make it legal for banks to enter the
insurance field.
15) A Supreme Court ruling in March 1996 held that
A) state laws to prevent banks from selling insurance can be superseded by federal rulings from
banking regulators that allow banks to sell insurance.
B) state laws to prevent banks from selling insurance cannot be superseded by federal rulings
from banking regulators that allow banks to sell insurance.
C) state laws to prevent banks from selling insurance can be superseded only if Congress enacts
legislation that allow banks to sell insurance.
D) state laws to prevent banks from selling insurance cannot be superseded by federal
legislation.
16) In response to banks entering into the insurance business, insurance companies have started
to supply ________ insurance.
A) debt
B) credit
C) equity
D) currency
17) The type of credit insurance that landed AIG into trouble in 2008 is called
A) insurance rate swaps.
B) monoline insurance.
C) default insurance.
D) credit default swaps.
18) Only ________ can issue monoline insurance policies.
A) life insurance companies
B) insurance companies that issue multiple types of insurance
C) property insurance companies
D) insurance companies that specialize in credit insurance alone
19) When those most likely to produce the outcome insured against are the ones who purchase
insurance, insurance companies are said to face the problem of
A) fraudulent claims.
B) moral hazard.
C) adverse selection.
D) pecuniary purchases.
20) Some automobile owners will drive faster knowing that they are covered by health and
automobile insurance. This behavior creates the problem of
A) fraudulent claims.
B) moral hazard.
C) adverse selection.
D) pecuniary purchases.
21) In the case of an insurance policy, ________ occurs when the existence of insurance
encourages the insured party to take risks that increase the likelihood of an insurance payoff.
A) moral hazard
B) opportunism
C) adverse selection
D) shirking
22) Adverse selection occurs when those ________ likely to get ________ insurance payoffs are
the ones who want to purchase insurance the most.
A) least; large
B) least; small
C) most; large
D) most; small
23) In the case of an insurance policy, ________ occurs when the existence of insurance
encourages the insured party to take risks that increase the likelihood of an insurance payoff;
________ occurs when those most likely to get large insurance payoffs are the ones who want to
purchase insurance the most.
A) moral hazard; insurance market discrimination
B) moral hazard; insurance segregation
C) moral hazard; adverse selection
D) adverse selection; moral hazard
24) Which of the following insurance practices attempts to minimize the adverse selection
problem insurance companies face?
A) prevention of fraud
B) risk-based premiums
C) restrictive provisions
D) deductibles
25) A deductible reduces ________ in exactly the same way as ________.
A) moral hazard; coinsurance
B) adverse selection; restrictive provisions
C) moral hazard; cancellation of insurance
D) adverse selection; limits on the amount of insurance
26) Coinsurance reduces moral hazard in exactly the same way as
A) limits on insurance.
B) risk-based premiums.
C) deductibles.
D) restrictive provisions.
27) Charging risk-based insurance premiums is a time-honored principle of insurance
management to reduce
A) moral hazard.
B) adverse selection.
C) free riding.
D) principal-agent problems.
28) Clauses in life insurance policies that eliminate death benefits if the insured person commits
suicide is an example of a
A) restrictive provision.
B) restrictive covenant.
C) anti-fraud exclusion.
D) risk-based deductible.
29) The higher the insurance coverage, the ________ the policyholder can gain from risky
activities that make an insurance payoff ________ likely.
A) more; less
B) more; more
C) less; less
D) less; more
30) Of the following financial intermediaries, which holds the least liquid assets?
A) property and casualty insurance companies
B) life insurance companies
C) money market mutual funds
D) commercial banks
31) Explain the problems that necessitate insurance management, and three methods insurance
companies use to address these problems. Identify the problem that each practice addresses.
1) Vesting refers to
A) the length of time an insurance company has been in business.
B) the length of time that a person must be enrolled in a pension plan before being entitled to
receive benefits.
C) the length of time until a CD matures.
D) the premium required under term insurance.
2) A defined-benefit pension
A) determines benefits by contributions and their earnings.
B) fixes benefits in advance.
C) links benefits to investment performance.
D) fixes benefits paid out for a limited number of years.
3) If a pension fund has sufficient contributions and earnings to pay benefits, it is said to be
A) underfunded.
B) at par.
C) fully funded.
D) over par.
4) If a pension fund has insufficient contributions and earnings to pay benefits, it is said it be
A) underfunded.
B) at par.
C) fully funded.
D) under par.
5) Fraudulent practices and other abuses of private pension funds led Congress to enact the
A) FDIC Act.
B) Federal Reserve Act.
C) FHLBS.
D) Employee Retirement Income Security Act.
6) The government corporation that insures pension benefits is
A) Fannie Mae.
B) Ginnie Mae.
C) Penny Benny.
D) Sallie Mae.
7) The Pension Benefit Guarantee Corporation performs a role similar to that of
A) the Federal Reserve System.
B) the Comptroller of the Currency.
C) the FDIC.
D) the Office of Thrift Supervision.
8) Since Social Security benefits are paid from current contributions, the system is a
A) privatized system.
B) overfunded system.
C) “pay-as-you-go” system.
D) defined contribution system.
9) Privatization of Social Security involves
A) tax reductions.
B) benefit reductions.
C) increasing the retirement age.
D) investing portions of the trust fund in corporate securities.
10) Social Security is a
A) fully funded pension plan.
B) federally insured private pension plan.
C) government sponsored private pension plan.
D) “pay-as-you-go” system.
11) Keough plans and IRAs are
A) individual pension plans.
B) government pension plans.
C) corporate pension plans.
D) public pension plans.
12) Allowing individuals to manage a portion of their Social Security funds is
A) socialization.
B) privatization.
C) democratization.
D) regeneration.
13) Privatization of the Social Security system is being considered due to
A) the desire to reduce taxes.
B) demands to reduce the retirement age.
C) reduced life expectancy.
D) underfunding of the system.
14) Explain why the Social Security system faces problems. Discuss the possible solutions to
these problems.
1) Compared to commercial banks and thrift institutions, finance companies are
A) heavily regulated.
B) able to attract small depositors.
C) prevented from making relatively small loans.
D) virtually unregulated.
2) The practice of factoring involves
A) the syndication of underwriting large security issues.
B) the selling of accounts receivable at a discount in return for cash.
C) breaking up large mutual funds into smaller funds.
D) spreading the risk of insurance through reinsurance.
3) Loans made to consumers by finance companies are typically
A) only for the purchase of cars or boats.
B) at interest rates below those charged by banks for the same type of loan.
C) at interest rates above those charged by banks for the same type of loan.
D) not made for less than $10,000.
4) The General Motors Acceptance Company (GMAC) is a
A) sales finance company.
B) consumer finance company.
C) business finance company.
D) public finance company.
5) A person remodeling her house could obtain a loan from a
A) sales finance company.
B) consumer finance company.
C) business finance company.
D) public finance company.
1) When a corporation wishes to sell new securities, it usually employs
A) a takeover specialist.
B) a finance company.
C) an investment bank.
D) a commercial bank.
2) In financial markets an IPO is an
A) investment portfolio option.
B) initial public offering.
C) initial portfolio offering.
D) investment portfolio offering.
3) In financial markets, when a firm issuing new securities has previously issued securities, these
securities are called
A) seasoned issues.
B) an initial public offering.
C) secondary issues.
D) investment-grade issues.
4) In financial markets, when a firm issues stock for the first time it is called an
A) investment portfolio option.
B) initial public offering.
C) initial portfolio offering.
D) investment portfolio offering.
5) IPOs have become very important in the U.S. economy because they are a major source of
financing for
A) so-called “blue-chip” companies.
B) hedge funds.
C) internet companies.
D) mutual funds.
6) Investment banks purchase new security issues in the hope of making a profit. This is the act
of
A) reinsuring.
B) factoring.
C) syndicating.
D) underwriting.
7) ________ assume the risk of issuing a new stock in the hope of earning profits on its sale.
A) Stock brokers
B) Securities dealers
C) Underwriters
D) Stock speculators
E) Reinsurers
8) Brokers, in contrast to security dealers
A) hold inventories of securities.
B) make their income through commissions.
C) make their living on the spread between the bid price and the asked price.
D) buy and sell securities at given prices.
9) ________ assist in the initial sale of securities in the primary market; ________ assist in the
trading of securities in the secondary markets.
A) Investment banks; mutual funds
B) Commercial banks; mutual funds
C) Investment banks; securities brokers and dealers
D) Commercial banks; securities brokers and dealers
10) The federal agency that ensures that potential security purchasers are well informed is the
A) FCC.
B) FTC.
C) NRC.
D) SEC.
11) An innovation that blurred the distinction between brokerage firms and commercial banks
was Merrill Lynch’s development in 1977 of the
A) cash management account.
B) money market mutual fund.
C) individual retirement account.
D) discount brokerage.
12) Elimination of minimum brokerage commission rates occurred because of
A) competition from banks.
B) demands of institution investors.
C) competition from foreign brokerage firms.
D) an action of the Securities and Exchange Commission.
1) Before 1970, mutual funds invested almost solely in
A) corporate bonds.
B) corporate common stocks.
C) United States government bonds.
D) municipal bonds and money market securities.
2) Mutual funds are primarily held by
A) financial institutions.
B) households.
C) nonfinancial businesses.
D) the Social Security trust fund.
3) Mutual funds that allow shares to be redeemed at any time at a price that is tied to the asset
value of the fund are known as
A) close-end funds.
B) open-end funds.
C) asset-value funds.
D) redeemable funds.
4) Mutual funds in which a fixed number of nonredeemable shares are sold at an initial offering
and are then traded in the over-the-counter market, like shares of common stock, are called
A) open-end funds.
B) close-end funds.
C) OTC funds.
D) primary-issue funds.
5) Most mutual funds are
A) no-load funds.
B) load funds.
C) large-load funds.
D) small-load funds.
6) Which of the following was the fastest-growing financial intermediary of the 1970s?
A) commercial banks
B) credit unions
C) finance companies
D) money market mutual funds
7) A sales commission is charged for the purchase of
A) no-load mutual funds.
B) load mutual funds.
C) sinking mutual funds.
D) syndicated funds.
8) Explain the factors that account for the large increase in market share experienced by mutual
funds since 1980.
1) Several features distinguish hedge funds from traditional mutual funds, including
A) mutual funds have a minimum investment requirement of $1,000 or more; hedge funds have
no minimum investment requirement.
B) hedge funds typically charge investors large fees relative to mutual funds.
C) hedge fund investors need not commit their money for more than a few weeks at a time,
explaining why they pay higher fees.
D) hedge funds are significantly less risky relative to mutual funds.
1) A type of investment fund that makes long-term investments in companies that are not
publicly traded is called a
A) private equity fund.
B) hedge fund.
C) sovereign wealth fund.
D) brokerage fund.
2) A ________ makes investments in new start-up businesses.
A) capital buyout fund
B) sovereign wealth fund
C) venture capital fund
D) hedge fund
3) A ________ makes investment in established businesses which are publicly traded and takes
them private.
A) sovereign wealth fund
B) capital buyout fund
C) hedge fund
D) venture capital fund
4) Which of the following is NOT an advantage of private equity funds?
A) Private companies are not subject to the same regulations as a publicly traded company.
B) Managers of private firms are not under the same level of pressure to produce high returns
compared to the managers of publicly traded firms.
C) Private equity firms can do a better job in controlling the problems created by moral hazard.
D) Private equity funds give managers of the companies higher stakes compared to managers in
publicly traded companies.
1) Of the three agencies that have been created to promote residential housing, the only one that
is an entity of the U.S. government is
A) Fannie Mae.
B) Ginnie Mae.
C) Freddie Mac.
D) Sallie Mae.
2) Which of the following is NOT a government-sponsored enterprise?
A) Fannie Mae.
B) Freddie Mac.
C) Federal Home Loan Banks.
D) Ginnie Mae.
3) Which of the following did not contribute to the failing of Freddie Mac and Freddie Mae?
A) Problems with adverse selection.
B) Problems with moral hazard.
C) Weak regulatory oversight.
D) Unethical accounting practices.