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
