320-ch. 13

The number of banks in the U.S. today is approximately: a. 7,500 b. 500 c. 100 d. 15,000

a. 7,500

One of the results of the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 was: a. A reversal of the branching restrictions of the McFadden Act b. An increase in the number of banks in the U.S c. A decrease in the average size of banks d. A decrease in commercial banks but an increase in the number of savings and loans and savings banks

a. A reversal of the branching restrictions of the McFadden Act

Which of the following is not a nondepository institution? a. A savings and loan b. An insurance company c. A mutual fund company d. A pension fund

a. A savings and loan

In many cases, life insurance companies will require applicants to take a physical. This is done to avoid the problem of: a. Adverse selection b. Moral hazard c. Paying claims d. Transaction costs

a. Adverse selection

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

a. An inventory loan

Hedge funds: a. Are strictly for millionaires b. Are heavily regulated c. Issue commercial paper and bonds d. Employ diversification techniques called "hedging."

a. Are strictly for millionaires

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

a. Below what private lenders pay

Which of the following is an example of the economies of scope argument for increased profits for large financial holding companies? a. Financial holding companies offer a wide array of services under one name b. Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size c. Financial holding companies are well diversified so risk is reduced d. The profitability of financial holding companies does not rely on one particular line of business

a. Financial holding companies offer a wide array of services under one name

The Federal Deposit Insurance Corporation (FDIC. was created: a. In 1933 as a part of the Glass-Steagall Act b. When the Federal Reserve was created in 1914 c. Prior to the stock market crash of 1929 d. In 1927 as a part of the McFadden Act

a. In 1933 as a part of the Glass-Steagall Act

Which of the following is an accurate statement about universal banks? a. In Germany universal banks do everything under one roof, including direct investment in the shares of nonfinancial firms b. In Germany the provision of insurance, banking, and securities must be done by separate corporations c. As in Germany, universal banks in the United States do everything under one roof, including direct investment in the shares of nonfinancial firms d. Universal banks in the United States account for the largest share of financial intermediary assets

a. In Germany universal banks do everything under one roof, including direct investment in the shares of nonfinancial firms

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 improves the allocation of resources across the economy

a. It is public information that the bank compiles and makes available to anyone

Insurance companies offer two basic type of insurance; these are: a. Life insurance and property and casualty insurance b. Life insurance and mutual funds c. Property and casualty companies d. Whole life and term life insurance companies

a. Life insurance and property and casualty insurance

The Glass-Steagall Act of 1933: a. Required commercial banks to sell off their investment banking operations b. Eliminated the FDIC c. Required federally chartered banks to meet the branching restrictions of the states d. Required all state banks to get federal charters

a. Required commercial banks to sell off their investment banking operations

The Bank Holding Company Act of 1956: a. Significantly broadened the scope of what bank holding companies could do b. Limited bank holding companies to operating only within their chartered state c. Limited the scope of bank holding companies in terms of services offered d. Repealed the McFadden Act of 1927

a. Significantly broadened the scope of what bank holding companies could do

In order for insurance companies to generate predictable payouts, they need to: a. Spread the risk across many policies b. Accept policyholders from a very specific geographic area c. Focus on insuring only specific events, for example only fire d. Offer only life insurance

a. Spread the risk across many policies

Insurance company assets will include: a. Stocks and bonds b. Only bonds c. Only stocks d. Only U.S. Treasury securities

a. Stocks and bonds

With the U.S. Social Security System, the risk of funding the system rests on: a. The current workers b. The retirees c. The federal government d. The Social Security Administration

a. The current workers

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

a. The underwriting services of investment banks

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

a. You may not be able to take your entire pension benefit from your previous job with you

A young father needing to provide his family with financial security would be better off purchasing: a. A whole life insurance policy b. A term life insurance policy c. As much life insurance as they can afford d. No life insurance; instead he should focus on saving

b. A term life insurance policy

As a result of technology, many small businesses today: a. Are located closer to their bank b. Are located further from their bank c. Have more face-to-face interactions with their banker d. No longer need banks

b. Are located further from their bank

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

b. As an alternative to purchasing reinsurance

The sharp reduction in the number of banks that has occurred since the mid 1990s has been due primarily to: a. Bank failures from increased competition b. Bank mergers c. The closing of banks by federal regulators d. The revoking of state bank charters

b. Bank mergers

Whole life insurance has decreased in popularity due to: a. Many whole life insurance companies becoming bankrupt b. Cheaper savings alternatives that have developed, making whole life policies expensive savings vehicles c. Mergers with property and casualty companies, raising the cost of all insurance d. Lower interest rates on alternative savings vehicles

b. Cheaper savings alternatives that have developed, making whole life policies expensive savings vehicles

One of the results of the limit on bank branching was: a. Increased diversification in the loan portfolio of small banks b. Curtailment of credit availability for borrowers in small towns c. Lower profits for banks d. Increased efficiency in the operations of banks

b. Curtailment of credit availability for borrowers in small towns

Which of the following is an example of the economies of scale argument for increased profits for large financial holding companies? a. Financial holding companies offer a wide array of services under one name b. Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size c. Financial holding companies are well diversified so risk is reduced d. The profitability of financial holding companies does not rely on one particular line of business

b. Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size

Which of the following is an example that can help explain increased profits for large financial holding companies? a. Financial holding companies offer a wide array of services under many brand names b. Financial holding companies need only one CEO, one Board of Directors, and one computer system regardless of size c. Financial holding companies are not well diversified and receive a higher return for the higher risk d. Financial holding companies are exempt from having to pay for FDIC insurance

b. Financial holding companies need only one CEO, one Board of Directors, and one computer system regardless of size

Universal banks are: a. Firms that engage in banking services across many countries b. Firms that engage a wide array of financial and non-financial activities c. Banks that make direct investment in non-financial firms d. Multinational corporations that own U.S. banks

b. Firms that engage a wide array of financial and non-financial activities

The bank failures that occurred during the early years of the Great Depression: a. Hurt large depositors the most since it was the large money center banks that failed b. Hurt small depositors the most since it was mainly small banks that failed c. Hurt the government insurance funds since FDIC covered most of the losses of depositors d. Totaled about 30% of total bank customer deposits

b. Hurt small depositors the most since it was mainly small banks that failed

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

b. Inadequate capital to handle a potential loss

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

b. Life insurance companies hold more in stocks than pension funds do

The U.S. has many banks because: a. Small banks are more profitable than large banks b. Many states outlawed bank branching c. The Great Depression caused the failure of the large banks, leaving many small banks d. The Glass-Steagall Act forced the splitting up of large banks

b. Many states outlawed bank branching

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

b. Margin loans for buying stock

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. Paying claims b. Moral hazard c. Adverse selection d. Transaction costs

b. Moral hazard

In the U.S. today: a. Most banks are federally chartered b. Most banks are state chartered c. There are approximately equal numbers of state and federally chartered banks d. All new banks are federally chartered

b. Most banks are state chartered

A typical automobile insurance policy is an example of: a. Liability insurance only b. Property and casualty insurance c. Property insurance only d. Casualty insurance only

b. Property and casualty insurance

The Gramm-Leach-Bliley Act: a. Repealed the Reigle-Neal Interstate Banking and Branching Efficiency Act b. Repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms c. Repealed the McFadden Act's restriction on bank branching d. Reinforced the Glass-Steagall Act's limitation on commercial banks' availability to merge with insurance or securities firms by increasing the penalties for doing so

b. Repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms

One way insurance companies deal with the problem of adverse selection is by: a. Charging the same price to everyone b. Screening applicants c. Monitoring policyholders after they have purchased insurance d. Spreading the risk in the same geographic area

b. Screening applicants

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

b. Take deposits

Modern forms of insurance can be traced back to around: a. The early 1900s b. The early 1400s c. The mid 1800s d. The late 1700s

b. The early 1400s

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: a. A moral hazard risk b. The risk of adverse selection c. The problem of information symmetry d. Risk spreading

b. The risk of adverse selection

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

b. The size of the purchase involved

In recent years Fannie Mae and Freddie Mac have been heavily criticized because of: a. Perceived discriminatory lending practices b. Their high degree of lending c. Charging rates of interest considered to be too high d. Using too much of their line of credit from the government

b. Their high degree of lending

Lloyd's of London has a reputation for insuring: a. Only low risk stable enterprises b. Unique and sometimes very odd situations c. Only physical structures to minimize the risks to their underwriters d. Only marine-related risks

b. Unique and sometimes very odd situations

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

b. Vesting

Considering the holdings of pension funds, one would expect that the stock market decline of 2001 through 2003 left many pension funds: a. The only source of income for many people near retirement b. Without sufficient funds to meet their obligations c. As the only source of funding for firms seeking investment funds d. With more than sufficient funds to meet their obligations

b. Without sufficient funds to meet their obligations

Citigroup is an example of: a. An Edge Act corporation b. A foreign bank c. A financial holding company d. A unit bank

c. A financial holding company

The actual results of the McFadden Act included: a. Increased efficiency of banking across the country b. A tight network of interconnected banks across the country c. A safety net that allowed small inefficient banks to continue to operate d. The elimination of banking monopolies

c. A safety net that allowed small inefficient banks to continue to operate

One result of the Reigle-Neal Interstate Banking and Branching Efficiency Act was that: a. Banking system efficiency decreased b. Banks became less geographically diversified c. Banking system efficiency increased d. Banks became less geographically diversified and banking system efficiency decreased

c. Banking system efficiency increased

Lloyd's of London is perhaps most known for: a. Being the largest insurance company in the world b. Going out of business when it insured too many odd risks c. Being the best-known insurance company in the world d. Being the oldest insurance company in the world

c. Being the best-known insurance company in the world

Which of the following statements best completes the following statement: "Over the past 30 years, the percentage(s) of assets for all financial intermediaries"? a. Controlled by banks has decreased as has the percentage for mutual funds while insurance companies have increased their percentage b. Controlled by insurance companies and mutual funds has decreased and the percentage controlled by banks has increased c. Controlled by banks and insurance companies has decreased while the percentage controlled by mutual funds and pensions has increased d. Controlled by banks, insurance companies, mutual funds and pensions have all increased

c. Controlled by banks and insurance companies has decreased while the percentage controlled by mutual funds and pensions has increased

One way that a bank could offer non-bank services across more than one state was to: a. File for a foreign bank charter b. Be a federally chartered bank rather than a state chartered bank c. Create a bank holding company d. Become a central bank

c. Create a bank holding company

The growth of international banking has: a. Decreased the competition that domestic banks face b. Decreased the efficiency of most banks c. Enhanced economic growth in many countries d. Increased the monopoly power of most banks

c. Enhanced economic growth in many countries

In recent years the U.S. banking structure has changed in such a way that there are now: a. More banks b. Fewer branches c. Fewer banks but more banks with branches d. Fewer banks and fewer banks with branches

c. Fewer banks but more banks with branches

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

c. Issuing commercial paper and bonds

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 b. Adverse selection c. Moral hazard d. Screening

c. Moral hazard

In the early years of the Great Depression, 1929-1933: a. Over one half of all U.S. banks failed b. Two-thirds of U.S. banks failed c. More than a third of all U.S. banks failed d. A little less than one-quarter of U.S. banks failed

c. More than a third of all U.S. banks failed

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

c. Pays off when you die while the pension plan pays off if you don't

Often Eurodollar deposits earn higher returns than U.S. bank deposits for all of the following reasons except: a. Eurodollar deposits are not subject to U.S. reserve requirements b. The bank does not have to pay deposit insurance premiums on these deposits c. Regulatory compliance may be more costly for a foreign bank than a U.S. bank d. Taxes on the profits at foreign banks may be lower than those for U.S. banks, allowing for higher returns

c. Regulatory compliance may be more costly for a foreign bank than a U.S. bank

Because most insurance companies insure many people, they do not have to worry about the problem of: a. Moral hazard b. Adverse selection c. Spreading of risk d. Information asymmetry

c. Spreading of risk

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

c. Spreading risk

Over the last twenty years in the U.S., the number of banks has: a. Steadily increased b. Stayed about the same c. Steadily decreased d. More than doubled

c. Steadily decreased

The dual banking system in the U.S. today refers to: a. A bank's ability to issue checking and saving accounts b. A bank's ability to own another financial institution c. The ability of banks to be either federally or state chartered d. A deposit institution's decision to be either a bank or a savings and loan

c. The ability of banks to be either federally or state chartered

Accounts receivables 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

c. The ability to turn a relatively illiquid asset into liquidity

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

c. The price investors pay for the security is less than the guaranteed price to the issuing firm

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

c. They offer the ability to make premium payments today in return for a promised payment under specified future circumstances

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

c. Very high risk

Which of the following statements most accurately describes the state of banking in the U.S.? a. A large number of large banks and a small number of small banks b. A large number of large and small banks c. A small number of large and small banks d. A large number of small banks and a small number of large banks

d. A large number of small banks and a small number of large banks

An Edge Act Corporation is: a. A company created so a U.S. bank can operate in more than one state b. A subsidiary of a bank created to provide insurance and securities services c. A company created by a non-bank corporation used to purchase and operate a bank d. A subsidiary of a domestic bank that is established specifically to engage in international banking transactions

d. A subsidiary of a domestic bank that is established specifically to engage in international banking transactions

Which of the following statements best completes the following statement: "Over the past 30 years, the percentage(s) of assets for all financial intermediaries"? a. Controlled by banks has increased while the percentage for mutual funds has decreased b. Controlled by banks has decreased as has the percentage for mutual funds while insurance companies have increased their percentage c. Controlled by insurance companies and mutual funds has decreased and the percentage controlled by banks has increased d. Controlled by banks has decreased while the percentage for mutual funds has increased

d. Controlled by banks has decreased while the percentage for mutual funds has increased

Which of the following is not a reason to create large financial holding companies? a. Financial holding companies offer a wide array of services under one brand name b. Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size c. Financial holding companies are well diversified so risk is reduced d. Financial holding companies are exempt from having to pay for FDIC insurance on deposits

d. Financial holding companies are exempt from having to pay for FDIC insurance on deposits

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

d. Many buyers and a few sellers

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 b. Adverse selection c. People going uninsured d. Moral hazard

d. Moral hazard

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

d. Moral hazard

When compared to Canada or Japan, the U.S. is unusual in that it has: a. Far fewer banks than either of those countries b. Fewer banks than Japan but more than Canada c. More banks than Japan but fewer than Canada d. More banks than either Japan or Canada

d. More banks than either Japan or Canada

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

d. Pay-as-you-go system

Congress chartered Sallie Mae to make loans to: a. Homeowners b. Customers of securities brokers c. Small business owners d. Students

d. Students

Insurance companies perform all of the following functions performed by financial intermediaries except: a. Transferring risk b. Pooling the resources of small savers c. Making large investments d. Supplying liquidity

d. Supplying liquidity

Many states prohibited bank branching because of all of the following except: a. They feared the concentration and monopoly power of large banks b. They generated significant revenue from issuing bank charters c. They wanted to protect the profits of banks since they generated tax revenue from these profits d. The McFadden Act of 1927

d. The McFadden Act of 1927

Insurance companies can predict fairly accurately: a. The percentage of policyholders who will have a claim and which policyholders will have a claim b. Which policyholders will suffer a loss but not the percentage of policyholders that will do so c. The type of losses policyholders will incur but not the percentage of policyholders that will file claims d. The percentage of policyholders that will file claims but not the policyholders that will file them

d. The percentage of policyholders that will file claims but not the policyholders that will file them

In response to the concerns that the structure of Fannie Mae and Freddie Mac could precipitate a financial crisis, it has been suggested that: a. The two enterprises be merged b. They be regulated by the Federal Reserve c. They diversify into other areas of lending besides housing d. They be required to hold capital in the same proportion as a commercial bank

d. They be required to hold capital in the same proportion as a commercial bank

Prior to the Civil War most state banks issued their own banknotes. This resulted in all of the following problems except: a. Their values decreased as the holder moved further from the bank b. They were worthless if the bank failed c. They were not efficient as a means of payment if the holder was far from the bank d. They were usually redeemable in gold

d. They were usually redeemable in gold

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

d. Usually require an employee to work a very long time for the same employer in order to reap a large benefit

Whole life insurance differs from term life in which of the following ways? a. Whole life has a variable premium over the life of the policy, increasing as the policyholder gets older. Term life has a fixed premium forever b. Term life has a savings component whole life is pure insurance c. Term life is usually more expensive than whole life d. Whole life is a combination of term life insurance and a savings account

d. Whole life is a combination of term life insurance and a savings account