Question 1

What services are finance companies able to offer consumers and businesses that banks do not offer?

Accepted Answer

The loans made by finance companies are similar to the consumer and commercial loans made by banks. However, because finance companies do not accept deposits, they are much more lightly regulated than banks. This allows finance companies to offer loans tailored to match the particular needs of borrowers more closely than do the standard loans offered by banks.

Question 2

What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?

Accepted Answer

First, policymakers did not see these firms as being as important to the financial system as were commercial banks, and regulators did not believe that the failure of these firms would damage the financial system. Second, these firms deal primarily with other financial firms, institutional investors, or wealthy private investors rather than with unsophisticated private investors.

Question 3

The portfolios that mutual funds offer to savers are

Accepted Answer

A) usually made up of bonds. 
B) usually made up of common stocks. 
C) tax free in most states. 
D) usually more liquid than the underlying assets. 
A) usually made up of bonds. 
B) usually made up of common stocks. 
C) tax free in most states. 
D) usually more liquid than the underlying assets. D

Question 4

Factoring

Accepted Answer

A) involves selling stocks and using the proceeds to buy bonds. 
B) is purchasing accounts receivable at a discount. 
C) is calculating the optimal par values of stocks and bonds. 
D) has been declared illegal under the Factoring Reform Act of 1994. 
A) involves selling stocks and using the proceeds to buy bonds. 
B) is purchasing accounts receivable at a discount. 
C) is calculating the optimal par values of stocks and bonds. 
D) has been declared illegal under the Factoring Reform Act of 1994.

Question 5

Vesting refers to

Accepted Answer

A) the right of the holder of an insurance policy to collect for an insurable event. 
B) the shielding of returns on whole life policies from taxation. 
C) the length of service required of an employee before he or she is eligible for a pension. 
D) the payments made by an employee into a pension plan. 
A) the right of the holder of an insurance policy to collect for an insurable event. 
B) the shielding of returns on whole life policies from taxation. 
C) the length of service required of an employee before he or she is eligible for a pension. 
D) the payments made by an employee into a pension plan.

Question 6

Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of

Accepted Answer

A) moral hazard. 
B) the drug abuse problems currently plaguing the country. 
C) adverse selection. 
D) failure of policyholders to keep paying their premiums. 
A) moral hazard. 
B) the drug abuse problems currently plaguing the country. 
C) adverse selection. 
D) failure of policyholders to keep paying their premiums.

Question 7

What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?

Accepted Answer

A) 401(k)plans 
B) Social Security plans 
C) Early retirement plans 
D) 486(b)plans 
A) 401(k)plans 
B) Social Security plans 
C) Early retirement plans 
D) 486(b)plans

Question 8

All of the following are differences between hedge funds and mutual funds EXCEPT

Accepted Answer

A) hedge funds are largely unregulated. 
B) hedge funds consist of a relatively number of wealthy investors. 
C) hedge funds make risky investments that mutual funds cannot make. 
D) hedge funds use money collected from savers to make investments. 
A) hedge funds are largely unregulated. 
B) hedge funds consist of a relatively number of wealthy investors. 
C) hedge funds make risky investments that mutual funds cannot make. 
D) hedge funds use money collected from savers to make investments.

Question 9

Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of

Accepted Answer

A) moral hazard. 
B) adverse selection. 
C) drunk driving. 
D) failure of policyholders to keep paying their premiums. 
A) moral hazard. 
B) adverse selection. 
C) drunk driving. 
D) failure of policyholders to keep paying their premiums.

Question 10

What are some reasons that hedge funds have become controversial?

Accepted Answer

First, while mutual fund managers typica

Question 11

All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT:

Accepted Answer

A) some trading of derivatives are required to take place on exchanges 
B) large hedge funds are required to register with the SEC 
C) firms selling mortgage-backed securities and similar assets are required to hold 5% of the credit risk 
D) securitized loans must now be insured 
A) some trading of derivatives are required to take place on exchanges 
B) large hedge funds are required to register with the SEC 
C) firms selling mortgage-backed securities and similar assets are required to hold 5% of the credit risk 
D) securitized loans must now be insured

Question 12

Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed?

Accepted Answer

A) credit risk 
B) liquidity risk 
C) principal risk 
D) default risk 
A) credit risk 
B) liquidity risk 
C) principal risk 
D) default risk

Question 13

Which of the following is an investment institution?

Accepted Answer

A) The New York Stock Exchange 
B) Greater Illinois Savings and Loan 
C) Prudential Insurance Company 
D) Fidelity Magellan Mutual Fund 
A) The New York Stock Exchange 
B) Greater Illinois Savings and Loan 
C) Prudential Insurance Company 
D) Fidelity Magellan Mutual Fund

Question 14

Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009?

Accepted Answer

A) increased leverage 
B) government insuring money market deposits 
C) many firms borrowing long term for short-term investments 
D) trading of derivatives on exchanges 
A) increased leverage 
B) government insuring money market deposits 
C) many firms borrowing long term for short-term investments 
D) trading of derivatives on exchanges

Question 15

In investment banking the "spread" is the difference between

Accepted Answer

A) the value of a firm's assets and the value of its liabilities. 
B) the bid and asked prices on a bond. 
C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market. 
D) the price of a new stock issue and the price of an equivalent new bond issue. 
A) the value of a firm's assets and the value of its liabilities. 
B) the bid and asked prices on a bond. 
C) the price of new capital guaranteed to the issuing firm and the price that can be obtained in the market. 
D) the price of a new stock issue and the price of an equivalent new bond issue.

Question 16

Sales finance companies

Accepted Answer

A) purchase accounts receivable of small firms at a discount. 
B) sell commercial paper and buy long-term corporate bonds. 
C) take in deposits from savers and buy corporate commercial paper. 
D) are affiliated with companies which manufacture or sell goods. 
A) purchase accounts receivable of small firms at a discount. 
B) sell commercial paper and buy long-term corporate bonds. 
C) take in deposits from savers and buy corporate commercial paper. 
D) are affiliated with companies which manufacture or sell goods.

Question 17

The shadow banking system refers to

Accepted Answer

A) commercial banks. 
B) community banks. 
C) pawn shops and institutions that offer payday loans. 
D) nonbank financial institutions such as investment banks and hedge funds. 
A) commercial banks. 
B) community banks. 
C) pawn shops and institutions that offer payday loans. 
D) nonbank financial institutions such as investment banks and hedge funds.

Question 18

What are the risks and reward for investment banks involved in underwriting a new security issue?

Accepted Answer

The investment bank earnings result from

Question 19

What are three reasons that employees may prefer to save through pensions provided by employers rather than through savings accounts?

Accepted Answer

First, pension funds may be able to mana

Question 20

Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%. What happens to its return on equity investment?

Accepted Answer

A) declines by 1% 
B) increases by 1% 
C) declines by 100% 
D) increases by 100% 
A) declines by 1% 
B) increases by 1% 
C) declines by 100% 
D) increases by 100%

What services are finance companies able to offer consumers and businesses that banks do not offer?

What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?

The portfolios that mutual funds offer to savers are

Factoring

Vesting refers to

Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of

What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?

All of the following are differences between hedge funds and mutual funds EXCEPT

Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of

What are some reasons that hedge funds have become controversial?

All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT:

Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed?

Which of the following is an investment institution?

Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009?

In investment banking the "spread" is the difference between

Sales finance companies

The shadow banking system refers to

What are the risks and reward for investment banks involved in underwriting a new security issue?

What are three reasons that employees may prefer to save through pensions provided by employers rather than through savings accounts?

Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%. What happens to its return on equity investment?

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

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Exam 11: Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

What services are finance companies able to offer consumers and businesses that banks do not offer?

What were the two main rationale for exempting nonbanks from restrictions on assets and degrees of leverage?

The portfolios that mutual funds offer to savers are

Factoring

Vesting refers to

Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of

What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?

All of the following are differences between hedge funds and mutual funds EXCEPT

Charging drivers with good records lower premiums than drivers with bad records is an example of an attempt by insurance companies to deal with the problem of

What are some reasons that hedge funds have become controversial?

All of the following are new rules affecting the shadow banking system as a result of the Dodd-Frank Act EXCEPT:

Which of the following is when an investment bank purchases securities outright in case it misjudged the state of the market and it may have to sell the securities at a lower price than what was guaranteed?

Which of the following is an investment institution?

Which of the following was the main reason for increased counterparty risk in the shadow banking system prior to the financial crisis of 2007-2009?

In investment banking the "spread" is the difference between

Sales finance companies

The shadow banking system refers to

What are the risks and reward for investment banks involved in underwriting a new security issue?

What are three reasons that employees may prefer to save through pensions provided by employers rather than through savings accounts?

Suppose an investment bank has a leverage ratio of 10 and the value of its securities decline by 10%. What happens to its return on equity investment?

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, Information, and Financial Market Efficiency

Derivatives and Derivative Markets

The Market for Foreign Exchange

Transactions Costs, Asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Monetary Theory II: The IS-MP Model

Filters