Chapter 2—APPENDIX: Objectives and Constraints of Institutional Investors
TRUE/FALSE
1. Non-life insurance companies have somewhat unpredictable cash outflows and are therefore faced
with different investment constraints than life insurance companies.
2. Many endowments are tax-exempt.
3. Cash flows for nonlife insurance companies, such as property and casualty, are similar to cash flows of
life insurance companies.
4. Banks must compete for funds (savings deposits, CDs, etc.) in order to make loans and other types of
investments.
5. Banks have high liquidity needs and therefore, have a short time horizon.
6. Banks face regulatory constraints at both the state and federal level.
MULTIPLE CHOICE
1. Which of the following is not true regarding defined contribution pension plans?
a.
Employees make regular contributions to the plan.
b.
Employers make regular contributions to the plan.
c.
The employer bears all of the investment risk.
d.
Benefits are directly related to the earnings of the funds investments.
e.
The number of defined contribution plans is increasing.
2. In a defined contribution pension plan,
a.
The plan does not promise to pay the retiree a specific income stream after retirement.
b.
The plan does promise to pay the retiree a specific income stream after retirement.
c.
The employee’s retirement income is not an obligation of the firm.
d.
The company carries the risk of paying future pension benefits to retirees.
e.
Choices a and c.
2
3. The retirement plan that promises to pay a specific benefit to its beneficiaries is
a.
A defined contribution plan.
b.
A defined benefit pension plan.
c.
A non-contribution pension plan.
d.
An actuarial pension plan.
e.
Choices a and c.
4. Endowment funds
a.
Are formed from the contributions to charitable and educational institutions.
b.
Are attractive investments for individuals with low liquidity needs.
c.
Usually have very short investment horizons.
d.
Provide retirement benefits for public employees.
e.
Provide death benefits for its contributor’s survivors.
5. _________ are investment specialists that are responsible for managing the investments of others.
There are often legal standards against which they must abide in the performance of their duties.
a.
Underwriters
b.
Investments bankers
c.
Fiduciaries
d.
Account executives
e.
Trust officers
6. Banks typically
a.
Have low liquidity needs.
b.
Face very few federal and state regulatory constraints.
c.
Don’t have to compete for funds.
d.
Have high liquidity needs and a short time horizons constraint.
e.
Low investment risk.
7. Banks typically have short-term investment horizons because
a.
They have a strong need for liquidity.
b.
They offer short-term deposit accounts.
c.
They are required to by federal and state laws.
d.
Choices a and b.
e.
All of the above