FP.14: Function, Purpose, and Regulation of Financial Institutions

Which of the following financial institutions advise and administer asset pools for individuals, firms, and governments? Choose the best answer. 1. Investment Bank 2. Venture Capital Firm 3. Asset Management Firm 4. Insurance Company 5. Pension Fund

3. Asset Management Firm Asset management firm, sometimes known as investment management firms advise or manage mutual funds, pension funds or other pools of assts. Their clientele include individuals, companies, and governments.

defined-benefit plan

employee's pension benefit is determined by a formula that takes into account years of service to the employer and, in most cases, wages or salary. The amount the employee receives is defined for him or her. Most common formulas used to determine the benefit are flat amount, flat percentage and unit credit. A pension is an example of a defined benefit plan. A major distinction between a defined-benefit plan and a defined-contribution plan is that the defined-benefit plan requires an annual actuarial assessment.

Deep discount brokers or electronic brokers

take buy and sell orders over the Internet. Most provide no investment advice. The investor/client might not even speak with a human as a self-service transaction is executed. Some electronic brokers provide printed investment research. If so, it might be free or there may be a modest charge.

Full-service brokers

take buy and sell orders, extend margin credit to customers, hold the clients' securities in safekeeping, and collect cash dividends. Most importantly, they also provide free investment research and offer comprehensive investment planning advice and services.

An account with a federally insured bank or thrift institution, is insured for up to $_____________ per account of the same registration and same institution. For example, you may have $90,000 in a savings account and $180,000 in a checking account, both in your name at the same institution. Your combined money ($270,000) will be insured for $_______________.

$250,000

Joint deposit accounts are owned by two or more people who have equal rights to withdraw money from the account. For example, Tom and Sue jointly own a CD worth $550,000 at an insured bank. Tom and Sue's share of the joint account is considered equal under FDIC rules, unless otherwise stated in the bank's records. Therefore, Tom owns $275,000 and Sue owns $275,000, with each spouse insured up to ______________.

$250,000. The remaining $50,000 or $25,000 for each spouse is over the FDIC insurance limit, and is not insured. Each spouse has coverage of $250,000

Debbie has a margin account with her brokerage firm that has $200,000 in stocks and $300,000 in cash. How much would SIPC cover in case the broker-dealer runs into financial problems?

$450,000 SIPC covers $500,000 per account. But it only covers up to $250,000 for cash positions. Therefore, Debbie's total coverage is all of the value of the securities of $200,000, plus up to $250,000 of the cash holdings. So her total coverage is $450,000.

Which of the following statements correctly applies to FDIC insurance? (Check all that are true.) 1. FDIC insurance insures up to $250,000 per depositor 2. Guarantees recovery of funds up to $10,000 3. Is backed by the Federal government 4. FDIC guarantees up to $500,000 for joint accounts for spouses

1. FDIC insurance insures up to $250,000 per depositor 3. Is backed by the Federal government 4. FDIC guarantees up to $500,000 for joint accounts for spouses The Federal Deposit Insurance Corporation insures commercial banks and savings and loans accounts up to $250,000. The Federal government guarantees it. It is not available for any other financial institution, therefore giving commercial banks and savings and loans the lowest risk of financial institutions. The insurance is limited to $250,000 per account. A joint account would still have a maximum protection of $500,000.

Which of the following financial institutions help companies raise capital? (Check all that are true.) 1. Investment Bank 2. Venture Capital Firm 3. Asset Management Firm 4. Insurance Company 5. Pension Fund

1. Investment Bank 2. Venture Capital Firm Investment banks raise capital for large corporations while venture capital firms help bring investors' money to start-up companies.

All of the following statements are objectives of the Dodd-Frank Act, except: 1. To insure deposits at commercial banks 2. To promote the financial stability of the United States by improving accountability and transparency in the financial system 3. To end "too big to fail" 4. To protect the American taxpayer by ending bailouts

1. To insure deposits at commercial banks It is the Federal Deposit Insurance Corporation's (FDIC) responsibility to insure deposits at commercial banks and savings and loans. The Dodd-Frank Act was instated after the crash of 2007-08.

Which of the following bank products and services are NOT FDIC insured? (Check all that are true.) 1. Savings Account 2. Checking Account 3. CDs 4. Mutual Funds 5. Investment Advice 6. Money Market Mutual Funds 7. Stocks and Bonds

4. Mutual Funds 5. Investment Advice 6. Money Market Mutual Funds 7. Stocks and Bonds FDIC insurance only applies to deposit institution products such as checking, savings and money market deposit accounts, and CDs. Mutual funds, annuities, life insurance policies, stocks and bonds offered at banks are not insured. Do not confuse a money market mutual fund with a bank's FDIC-insured money market deposit account.

How are reinvested dividends treated when determining a holding period return?

As part of the cost basis. [(ending value - beginning value) / beginning value.]

asset management account

an account with a comprehensive financial services package offered by a brokerage firm that could include a checking account; a credit card; a money market mutual fund; loans; automatic payment on any fixed debt (such as mortgages); brokerage services (buying and selling stocks or bonds); and a system for the direct payment of interest, dividends, and proceeds from security sales into the money market mutual fund.

defined-contribution plan (sponsored pension/retirement funds)

each employee has an account into which the employer and usually the employee make regular contributions. The employee defines how much is put into the plan. At retirement, the employee receives a benefit whose size depends on the accumulated value of the funds in the retirement account

Discount brokers

simply take orders from their clients; they furnish little or no investment advice

A _______________ is simply someone licensed to buy or sell stocks for others

stockbroker