Finance 337 Exam #2

Credit unions main type of loans is______

Automobile loans

How can being oversubscribed of undersubscribed be a bad thing when issuing a security?

Because if you are undersubscribed that means you should have raised the price and gotten more for your shares. and visa versa

Suppose a companies pension plan promises employees a specific amount of income when they retire, but the plan does not have the assets to meet these future obligations to employees. This plan represents a defined ________ plan that is ________

Benefit; underfunded

What is the difference between a broker and a dealer?

Brokers are pure middleman; dealers make markets by standing ready to buy and sell at given prices (The actual investor)

What are the three main types of finance companies?

Business, sales, and consumer

Which type of Equity fund has the highest risk?

Capital Appreciation

The largest share of assets held by money market mutual funds is

Commercial paper

In 2010 the largest portion of loans made by finance companies was ______ representing 43.4% of the loans

Consumer loans

The largest share of life insurance companies assets are

Corporate bonds

Discuss the four primary classes of mutual funds available to investors

1. Equity funds: invest in common stocks which represent an ownership share (or equity) in corporations. 2. Money market: are fixed income securities with a very short time to maturity and high credit quality 3. Bond funds: Invest in bonds 4. Hybrid funds: Invest in both stocks and bonds

S&L accounts

1. FDIC insured up to $250,000 per account 2. Most are members of the Federal Home Loan Bank System - Set minimum capital requirements - Approves mergers and sets the rules for branching - Makes loans below the rates found in the open market

From the largest to the smallest in terms of total assets the 4 classes of mutual funds are..

1. Largest: Equity funds 2. Money Market Funds: 3. Bond funds 4. Smallest: Hybrid funds

How do consumer loans differ between those issued by finance companies and those issued by banks?

1. Loans made by finance companies are often riskier than those issued by banks 2. Consumer finance companies are typically owned by the manufacturer whose product are being financed

Thrifts suffered problems in the 1970s as of?

1. Market interest rates rose above the rates thrifts were allowed to pay on deposits and savings accounts 2. Thrift customers moved their funds from thrifts to money market mutual funds (Look up thrifts)

In the case of an insurance policy, _______ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ______ occurs when those most likely to get large insurance payoffs are the ones who want to purchase the insurance the most.

1. Moral Hazard; Adverse selection

What is a pro of bank consolidation?

1. More efficient banks 2. Will take advantage of economies of scale 3. Eliminates geographic restrictions

Tasks that investment bankers perform when acting as underwriters to sell securities to public includes?

1. Preparing the filings required by the SEC 2. Pricing the security 3. Arranging for the security to be rated

In 1980s, thrift institutions which had been restricted to only making loans for home mortgages where allowed by regulators to?

1. Purchase junk bonds 2. Finance acquisitions in commercial real estate 3. Extend consumers loans

The government granted thrifts greater power in the early 1980s in hopes of turning the industry's problems around. These powers were?

1. Required greater expertise in managing risk than thrifts managers possessed 2. Encouraged thrifts to expand lending rapidly in real estate, increasing their exposure to risk 3. Expanded the scope and complexity of thrift lending activities that went beyond what regulators could effectively monitor, given their limited resources

The Glass-Steagall Act did what two things?

1. Separated commercial and investment banking 2. Made it illegal for commercial banks to buy or sell securities on behalf of its customers

what two things are true about life insurance companies?

1. They primarily hold longterm assets that are not particularly liquid 2. Payouts to policyholders are relatively predictable

Savings and loan associations

1. Were established by Congress to encourage home ownership 2. Initially were not permitted to accept demand deposits 3. Held about 85% of their assets in the form of mortgages prior to the great depression

What are the three types of finance companies?

1.Business: (Commercial) No depositors to protect, no restricted activities 2. Consumer: Make loans to consumers for furniture home appliances, and retail credit cards 3. Sales Finance company: Sears cards, or compete directly with banks for consumer loans. IR are usually lower then banks to get sales up!

When and why was the Glass Steagall Act passed? When and why was it repealed?

1999 with the Gramm Leach Bliley Act

What are the two major risks that finance companies face?

Default risk - non repayment of Loans and liquidity risk - when a firm runs short on cash and cannot convert their assets to cash fast enough

Explain the difference between defined benefit and defined contribution pension plans

Defined benefit = employer pays Defined contribution pension = you pay, (401(K))

Which of the following pensions does not promise employees a specific retirement benefit?

Defined contribution plan

Bank loans from the Federal Reserve are called______ and are a ______ of cash?

Discount loans, source

What benefits do mutual funds offer investors...

Diversification, access to higher priced securities

Name and describe two benefits of mutual funds?

Diversified market, access to higher stocks

What is the structure of the banking system here in the united states?

Dueling banking system, federal government and state

What changes have banks made in their industry as a response to the many new technologies that have been developed? And which change do you believe was the most necessary?

Electronic banking, electronic payment, electronic money, and a cashless society

How did the Glass-Steagal Act restrict the Banking/Financial services system, until its repeal

Engaging in underwriting of and dealing in corporate securities, therefore separating commercial banking and investment banking

The Glass Steagall Act of 1933 prohibited commercial banks from..

Engaging in underwriting of and dealing in corporate securities, therefore separating commercial banking and investment banking

Today the united states has a duel banking system, it is supervised by..

Federal government and states

Banks are insolvent when their..

Liabilities exceed their assets

Most mutual funds are structured in two ways. The most common structure is an ________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. An _______ fund has fixed number of nonredeemable shares that are traded in the over the counter market

Open-end; closed-end

The Riegle Neal Act of 1994 did?

Overturned prohibition of interstate banking and branching

Who insures pension plans?

Pension Benefit Guarantee Corporation

By law investors must be given a portion of the registration statement before they can invest in a new security, this document is called a?

Prospectus

although finance companies are largely unregulated, they do face some regulations aimed primarily at

Protecting unsophisticated customers

Credit unions main source of funds is

Regular share accounts

What is the main reason for financial innovation?

Regulations is the main reason, also changes in demand have an effect

The policy of _______ exacerbated _____ problems as savings and loans took on increasingly huge levels of risk on the slim chance of returning solvency

Regulatory forbearance; Moral hazard

ROA

Return on Assets = Profits/Assets

ROE

Return on Equity = Profits/Equity Capital

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

Risk based premiums, screening, restrictive provisions and deductibles and coinsurance

The Federal Reserves Regulation Q is?

Set maximum interest rates bank could pay on deposits

Mutual Savings Banks

Similar to S&L but are jointly owned by the depositors (about half are chartered by the state) - FDIC insures up to $100,000 per account - Branching regulations are determined by the states in which they operate in - Depositors and lenders have voting rights

How did ownership by its depositors help mutual savings bonds survive the great depression?

Since Mutual Savings Banks are owned by its depositors, ownership led to a conservative investment posture, which prevented many of the mutual savings banks from failing during the recession at the end of the nineteenth century or during the Great Depression

A typical venture capital firm has a _______ number of investors who each contribute a ________ of money to the fund

Small; large

_______ is an insurance product that will help if you live longer then you expect. For an initial fixed sum or stream of payments, the insurance company agrees to pay you a fixed amount for as long as you live.

An annuity

Sweep Accounts

An arrangement in which any balances above a certain amount in a corporations checking account at the end of a business day are "swept out" of the account and invested in overnight repos that pay the corporation interest. Banks voluntarily hold more reserves than they are required to.

The largest share of total investment in mutual funds is in

Stock funds

Which of the following do not help people during their retirement?

Term life Insurance

which of the following is an advantage to investors of an open-end mutual funds?

The funds agrees to redeem at any point in time

Name some of the advantages of international banking facilities

They are not subject to the same interest rates of regulations that american banks are subject to

An undersubscribed issue occurs when sales agents have been unable to generate sufficient interest amoung their customer to sell all the securities by the issue date.

True

Finance companies essentially sell commercial paper use the proceeds to make loans:

True

In a lease financing arrangement a finance company will purchase equipment which it then leases to a company for a set period

True

Installment credit is a loan that requires the borrower to make a series of equal payments over some fixed length of time

True

The congressionally imposed cap on the interest rate that S&Ls could pay on savings accounts became a serious problem for them in the 1970s when inflation rose.

True

The primary purpose of loads is to provide compensation for sales brokers.

True

When a lifelong chain smoker attempts to purchase a life insurance policy the insurance company faces the problem of adverse selection

True

What are two differences between mutual funds and hedge funds

Usually hedge funds you need atleast 100k - 20m to invest in

What statutes limits the level of interest rates that finance companies can charge their customers?

Usury statutes

Total reserves =

Vault cash, and cash at the fed

A _______ is a specialized firm that finances young, start-up firms

Venture capital firms

Loads:

What is the difference between loaded mutual funds and no-load mutual funds? A load mutual fund charges a sales commission for buying shares in the fund. These charges can occur at the time of purchase, when you make the sale, or sometimes even both. How bad can the loaded mutual funds hit you in the end? There are some mutual funds that carry loads as much as 7%. Put that in perspective, a loaded mutual fund with a front-end load of 7% would take $7,000 of your money before you even get started if you invest $100,000. A no-load mutual fund is just as it sounds, free of any commissions or fees to buy or sell the fund.

Major controversy involving the U.S. banking industry in the early years was..

Whether the federal government or the states should charter banks (Charter means:A financial institution whose primary roles are to accept and safeguard monetary deposits from individuals and organizations, and to lend money out.)

Consumer finance companies typically make loans to consumers who

cannot obtain credit otherwise due to low income and poor credit

sales finance companies make loans to consumer to purchase items

from a particular retailer

A term life insurance policy provides

insurance benefits only

The federal funds rate is..

the interest rate on loans of reserves from one bank to another

How do finance companies differ from banks?

...

IBFs (International Banking Facilities) created to keep money in the US. Exempt from state and local taxes. Not subject to reserve requirements and restrictions on interest payments

...

Name one way venture capitalists reduce asymmetric information?

...

What are classes of load funds and a character for each?

...

What are the two alternatives for banks to keep from declaring bankruptcy?

...

What is the importance of regulating mutual funds?

...

Why did it take so long for the USA to charter a central bank for the country? Who was opposed to it, who was for it and why did each side feel the way they did?

...

Why was the Reform Recovery and Enforcement of Act of 1989 created and what was its purpose?

...

______ which insures against the loss of a ship, oldest form of insurance

...

Bank Leverage or EM ratio

Bank Leverage = Total assets/total net worth

Chapter 19: Seagall act of 1933

Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and investment banks

From an investment bank's perspective the best outcome occurs when a new issue is

Fully subscribed, look this up

Chapter 20:Mutual funds offer investors all the following except

Greater than average returns

An investment bank is a financial institution that

Helps corporations raise funds, helps them sell IPOs and new issue bonds and such. Defines the price they should sell them at.

Hedge funds are

High risk, even though they may be market neutral

How was the Automated Teller Machine innovated?

I believe because of the McFadden Act

______ perform their main function in the primary market for securities and ______ perform their main function in the secondary market

Investment banks; Securities brokers and dealers

The legislation that effectively prohibited banks from branching across state lines and forcred all national bankto conform to branching regulations of the state is which they redise is the

McFadden Act

Finance companies are ______ market intermediaries

Money

All ________ are open end investment funds that invest only in the money market securities

Money market mutual funds

The largest asset held by S&Ls is...

Mortgage loans

S&L associations most dominant assets are?

Mortgages

Calculating reserve amount requirement

Multiple the rate required by the amount of checking deposits, this will give you the required amount to have on hand

Credit unions are characterized by

Mutual ownership, Nonprofit tax exempt status and common bond membership

Compare the characteristics of an open-ended versus closed-end mutual funds

One you can take your money out, the other you can not.