Fin305 Midterm 2

the ______ insures losses of funds deposited with securities firms in the event of failure of a securities firm

SIPC

successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks, thereby reducing losses due to

adverse selection

when the potential borrowers who are the most likely to default are the ones most actively seeking a loan, ______ is said to exist

adverse selection

the problem created by asymmetric information before the transaction occurs is called ______, while the problem created after the transaction occurs is called

adverse selection, moral hazard

An ______ plan does not require the employer to guarantee retirement benefits nor to maintain a minimum level of pension reserves

defined contribution

a financial institution can achieve cost savings in its credit card operations if it increases the number of cardholders. This is an example of

economies of scale

financial intermediaries can substantially reduce transaction costs per dollar of transactions because their large size allows them to take advantage of

economies of scale

financial intermediaries do

exist because there are substantial information and transaction costs in the economy improve the lot of the small saver are involved in the process of indirect finance

FINRA is a government agency with mandate to protect America's investors by making sure the securities industry operates fairly and honestly

false

in a bankruptcy situation, the federal reserve acts as the liquidator of the bank

false

in a defined benefit plan, the retirement benefit will vary according to rates of return on pension fund reserves

false

policy reserves are the primary asset of the typical life insurer

false

savings institutions deposits and bank deposits are backed by 2 different insurance funds

false

since 1980, the number of banks in the US has been increasingly dramatically due to deregulation of the industry

false

the McFadden Act grants states the primary right to regulate insurance companies

false

the majority of banks are nationally chartered and insured by the FDIC

false

the problem of adverse selection helps to explain why direct finance is more important than indirect finance as a source of business finance

false

the process of financial intermediation is also known as direct finance

false

the securities investor protection corporation protects investors against losses due to unfavorable market moves of up to 500,000

false

in 2016 credit unions largest portion of investment securities was

federal agency securities

the presence of transaction costs in financial markets explains, in part, why

financial intermediaries and indirect finance play such an important role in financial markets

the Au ratio measures the bank's ability to ____ and the pm ratio measures the bank's ability to _____

generate income from assets; control expenses

IRAS are

self directed investment vehicles designed to provide supplemental retirement income

the primary regulator of insurance firms is the

state insurance regulator

a bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services

super regional bank

the following type(s) of life insurance policies do not have a savings feature variable life term life whole life universal life both variable life and universal life

term life

the operating ratio is calculated as

the combined ratio after dividends minus the investment yield

a best efforts offering is one in which

the investment banker acts only as a distribution agent

the principal agent would not arise if

the owners of the firm had complete information about the activities of the managers

in property and casualty insurance the combined ratio is equal to

the sum of the loss ratio plus the expense ratio

the lower the interest expense ratio, the provision for loan loss ratio, the non interest expense ratio, and the tax ratio the ________ the __________

higher, PM

private pension funds are funds administered by

insurance companies banks and mutual funds

the largest source of income at a typical bank is

interest income on loans and leases

an important financial institution that assists in the initial sale of securities in the primary market is the

investment bank

a retirement account specifically designed for self employed person is a

keogh

which of the following is a contractual savings institution? mutual fund credit union life insurance company savings and loan association

life insurance company

banks providing depositors with checking accounts that enable them to pay their bills easily is known as

liquidity services

the two major components of expense risk for P&C insurers are

loss adjustment expenses and variations in commission and other expenses

for p&C insurers, if the combined ratio is more than 100 percent, that firm

may have been profitable if investment returns were high enough

State chartered banks ________________ be members of the Federal Reserve System and nationally chartered banks ________________ be members of the Federal Reserve System.

may, must

most of the changes in size, structure, and composition of the banking industry in recent years are due to

mergers and acquisitions

ERISA established all but which of the following

minimum payouts for defined contribution plans

a bank that is located in a financial center and relies on non deposit or borrowed sources of funds for a significant portion of its liabilities

money center bank

if borrowers take on big risks after obtaining a loan, then lenders face the problem of

moral hazard

when the borrower engages in activities that make it less likely that the loan will be repaid, _______ is said to exist

moral hazard

property and casualty insurers hold _______ short term assets than life insurers because property and casualty loss rates are _______ predictable than life insurance loss rates

more, less

As a percentage of total assets, credit unions invest _______ in US gov securities than banks and ______ in consumer loans than banks.

more, more

credit unions are

mutual associations not open to the general public

historically, most savings institutions were established as

mutual organizations

After 2011, federally chartered savings institutions have primarily been regulated by

office of the comptroller of the currency

nationally chartered banks receive chartering and merger approval from the

office of the comptroller of the currency

the PBGC insures

participants of defined benefit plans if plan funds are insufficient to meet contractual pension obligations

social security is a

pay as you go system

the p&c loss ratio on an insurance line contains

payouts on claims costs associated with settling claims

which of the following is not an investment intermediary? finance companies pension funds mutual funds hedge funds

pension funds

moral hazard in equity contracts is known as the ____ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer

principal agent

loans

provide most of the banks revenues earn the highest return of all bank assets are the largest category of bank assets

under ERISA, pension fund managers are required to invest fund assets as wisely as if they were investing their own money. This requirement is called the

prudent person rule

the major result of the NSMIA was to

reduce state regulatory powers over securities firms

day to day trading practices of securities firms currently may be regulated by who

FINRA

interest bearing retail accounts with limited checking features designed to compete with money market mutual fund investments are called

MMDAs

which of the following financial intermediaries are depository instititions? credit union commercial bank savings and loan associations

all

401k plans

allow employer and employee contributions earnings accrue tax free during the employees working years they allow employee discretion in asset allocation

An _________ is a contra asset account

allowance for loan and lease losses

when you deposit $50 in the first national bank,

assets increase liabilities increase reserves increase

in financial markets, lenders typically have inferior information about potential returns and risks associated with any investment project. This difference in information is called

asymmetric information

the presence of _________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets

asymmetric information

commercial banks differ from other types of depository institutions in that

banks have more diversified asset portfolios banks obtain funds from more different types of sources the average size bank is larger than other depository institutions

the largest asset category of life insurers is _____ and the largest liability category is ______

bonds, policy reserves

at P&C insurers, if the combined ratio is less than 100 percent, the premiums charged were sufficient to cover

both losses and expenses

_______ are examples of investment bankers offering traditional commercial banking services

cash management accounts

which of the following are reported as liabilities on a banks balance sheet? loans reserves deposits with other banks checkable deposits

checkable deposits

cash in the process of collection is

checks that the bank is owed by has not yet collected

the largest depository institution (in terms of asset value) is

commercial banks

a bank that specializes in retail or consumer banking in a local market

community bank

in 2016, credit union's biggest type of loans was

consumer loans

which of the following is not an off balance sheet activity futures contract swap transaction letter of credit consumer loans

consumer loans

property and casualty insurance companies are what type of intermediary

contractual savings institution

what is the main asset held by private pension funds

corporate equities

which of the following assets are used to increase a bank's liquidity position? mortgage loans personal loans corporate loans treasury securities commercial loans

treasury securities

a financial intermediary's risk sharing activities are also referred to as asset transformation

true

a whole life insurance policy pays the face value of the contract on death of the policyholders to the beneficiaries

true

after deposits, the second largest source of funds at savings institutions is FHLB loans

true

credit unions are not taxed and, as a result, well run credit unions are often able to charge lower loan rates and pay slightly higher deposit rates than banks

true

if you are terminated before you are fully vested in an employer-sponsored plan, you may not get to keep previous contributions to your pension made by your employer

true

if you believe that taxes are going to go up and you will likely have to pay a high tax rate when you retire, you will probably be better off with a Roth IRA than with a traditional IRA

true

in a mutual organization, the depositors are owners of the institution

true

life insurance policy reserves are the estimated current worth of expected future payouts

true

life insurers write over 50% of all health insurance premiums

true

on average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets

true

pension contributions paid to insurance pension funds and the assets purchased with these funds become the legal property of the insurance company and are not the legal property of the individual pension fund contributors

true

the national credit union administration is the primary regulator of federally chartered credit uions

true

the policy employed in the 1980s of not closing economically insolvent savings institutions was called regulatory forbearance

true

a mutual fund is not a depository institution

truth

premiums recieved before the coverage period are termed

unearned premiums

the term variable in a variable life policy refers to the

variable growth rate of the cash value of the policy

investment firms that pool money from individuals and/or institutions and invest equity funds in start up firms are called

venture capital firms

the problem of adverse selection helps to explain

why borrowers are willing to offer collateral to secure their promises to repay loans why banks have a comparative advantage in raising funds for american businesses why banks prefer to make loans secured by collateral

are withdrawals after retirement not taxed in a roth ira

yes