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  1. Which of the following statements concerning investment company trends is (are) correct?
    (RM 492-493)

    I They were started after World War I, and they grew rapidly after World War II until the 1970s, when small investors withdrew funds.

    II Innovations have included money market mutual funds, global funds, and "vulture" funds.  

    A. I only   
    B. Both I and II   
    C. Neither I nor II
    D. II only   
    B. Both I and II 

    Both I and II correctly describe trends in the investment company industry. Money market funds (which invest mainly in high-quality, short-term securities), global funds (which invest in foreign securities), and "vulture" funds (which specialize in the securities of financially distressed companies) are all fairly recent innovations.
    (this multiple choice question has been scrambled)
  2. All the following statements concerning investment companies are correct, EXCEPT:           
    (RM 496-497) 

    A. Open-end companies will sell or redeem shares in any quantity demanded.   
    B. Load funds sell their shares at the shares’ net asset values plus a broker’s commission.   
    C. Closed-end investment companies have a limited number of ownership shares that are traded among investors.   
    D. No-load funds involve higher broker’s fees because there is no way to buy the shares directly from the investment company. 
    D. No-load funds involve higher broker’s fees because there is no way to buy the shares directly from the investment company. 

    No-load funds sell shares directly to investors, rather than selling through brokers. The term "no-load" refers to the absence of sales commissions to be paid by the investor/purchaser.
     
    (this multiple choice question has been scrambled)
  3. Which of the following statements concerning investment companies is (are) correct?
    (RM 498-499)

    I             They may trade too often, increasing management costs and decreasing long-run returns to investors.

    II            They may not benefit the small investor, but they do offer important benefits to the large investor in that securities markets are usually inefficient.  

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    C. I only 

    I correctly describes a problem with some investment companies. II is incorrect, however, because the primary benefit of investment companies is for the small investor. Large investors can obtain diversification and professional management of their portfolios on their own.
    (this multiple choice question has been scrambled)
  4. In the past, the assets held by pension funds have grown for which of the following reasons?
    (RM 502)

    I            Relatively few participants have been receiving retirement benefits.

    II            The proportion of the population over age 65 has been declining steadily.  

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    A. I only   

    II is an incorrect statement because the proportion of the U.S. population that is over age 65 has been growing for many years. The continued growth of the over-65 group will slow pension fund asset growth significantly.
     
    (this multiple choice question has been scrambled)
  5. All the following statements concerning the investment policies and practices of pension funds are correct, EXCEPT:
    (RM 502-503) 

    A. They can lock up investments for many years because their cash flow is predictable.   
    B. They generally follow practices that are similar to those of life insurance companies.   
    C. They invest long-term because their need to pay out cash is deferred.   
    D. They invest heavily in tax-exempt securities. 
    D. They invest heavily in tax-exempt securities.

    Private noninsured pension funds rarely invest in tax-exempt securities because most are "qualified" plans and are not taxed currently on investment income. Even state and local government pension funds invest very little in tax-exempt securities because they too are exempt from federal income taxation.
    (this multiple choice question has been scrambled)
  6. All the following statements concerning the investment policies of pension funds are correct, EXCEPT:
    (RM 502-503) 

    A. State and local government bonds are purchased because of their favorable tax treatment.   
    B. Predictable benefits help to assure predictable cash flows. 
    C. Corporate bonds are a common item in pension fund investment portfolios.   
    D. Pension funds need relatively little liquidity.   
    A. State and local government bonds are purchased because of their favorable tax treatment.   

    Neither private nor government pension funds need to invest significantly in tax-exempt securities.
    (this multiple choice question has been scrambled)
  7. Which of the following correctly explain(s) the difference between the composition of the investment portfolios of private, noninsured pension funds and that of state and local governments?
    (RM 503-504)

    I             Government plans need less liquidity in their investments.

    II            Corporate plans are regulated less strictly than government plans and therefore invest more extensively in common stocks. 

    A. Both I and II   
    B. I only   
    C. II only   
    D. Neither I nor II 
    C. II only 

    I is incorrect because state and local government pension funds have no substantially different need for liquidity than do private, noninsured plans. In both cases, the need for liquidity is low.
    (this multiple choice question has been scrambled)
  8. Which of the following explain(s) why there may be a slowing in the future growth rate for pension funds?
    (RM 506-507)

    I             Many established plans are experiencing a rising percentage of pension beneficiaries to working contributors.

    II            Government regulation may be a deterrent to the establishment of new plans and the expansion of existing plans. 

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    B. Both I and II   

    Both I and II are factors that probably will cause a slowdown in the future growth rate of pension funds.
     
    (this multiple choice question has been scrambled)
  9. All the following statements concerning the characteristics of life insurance company operations are correct, EXCEPT:
    (RM 509) 

    A. Premium income is largely predictable.   
    B. Death benefit payments are largely predictable.   
    C. Most benefit payments are made to deceased, rather than living, policyholders. 
    D. Policies mature on the average many years in the future.   
    E. The liabilities of life companies are long-term liabilities.   
    C. Most benefit payments are made to deceased, rather than living, policyholders.

    Of all the benefit payments made by life insurance companies, most are made to living, rather than deceased, policyholders. These "living benefits" include annuities, disability income benefits, and other health insurance benefits.
    (this multiple choice question has been scrambled)
  10. Which of the following statements concerning life insurance policy loans is (are) correct?
    (RM 511)

    I             They tend to increase in depression years and decline during prosperity.

    II            Policy loan interest rates are generally quite high. 

    A. I only   
    B. Both I and II   
    C. Neither I nor II 
    D. II only   
    C. Neither I nor II 

    I is incorrect because policy loans tend to rise during periods of high interest rates and expanding economic activity. They tend to decline during downturns in economic activity and interest rates. II is also incorrect, since life insurance policy loans typically carry quite low interest rates.
     
    (this multiple choice question has been scrambled)
  11. Which of the following statements concerning the sources of funds of life insurance companies is (are) correct?
    (RM 511)

    I             Investment income is usually less than premium receipts.

    II            Investment income usually accounts for the industry’s annual net earnings after expenses. 

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    • C. Both I and II 
    •   
    • Premium receipts are a typical life insurance company’s main source of income, but investment income accounts for most of its net earnings.
  12. Which of the following new services offered by life insurance companies in recent years have had particular appeal to pension fund investors?
    (RM 513-514)

    I             Variable life insurance

    II             Guaranteed investment contracts (GICs)

    III            Separate accounts 

    A. II and III only   
    B. I, II, and III 
    C. I and II only   
    D. I and III only   
    A. II and III only   

    I is incorrect because variable life insurance is an individual insurance product and, therefore, is of little interest to pension fund investors.
     
    (this multiple choice question has been scrambled)
  13. All the following statements concerning the risk patterns of property-casualty insurers are correct, EXCEPT:
    (RM 515-517) 

    A. Traditionally, in prior years, property-casualty insurers have invested in common stocks more than life companies because property-casualty companies have had less need for liquidity than life companies. 
    B. The cash flow of these insurers is generally less predictable than for life companies.   
    C. Inflation tends to increase their claim costs.   
    D. Professional malpractice and product liability suits have had an increasingly adverse impact on the net cash flow of the companies.   
    A. Traditionally, in prior years, property-casualty insurers have invested in common stocks more than life companies because property-casualty companies have had less need for liquidity than life companies. 

    Property-casualty insurance companies traditionally have had higher liquidity needs due to the volatility of their claims experience compared with that of life insurance companies. Property-casualty companies, however, do invest fairly heavily in common stocks, more so than do life companies, in order to hedge against inflationary pressures that are very severe in several property-casualty insurance lines.
     
    (this multiple choice question has been scrambled)
  14. All the following statements concerning the composition of the investment portfolios of property-casualty insurers are correct, EXCEPT:
    (RM 517) 

    A. U.S. government and federal agency securities have become increasingly popular with property-casualty companies in recent years.   
    B. Hedging inflation and providing liquidity are investment policy objectives for most property-casualty companies. 
    C. Tax-exempt securities are attractive because these companies are subjected to income taxes on their investment income.   
    D. Common stocks are avoided because they usually are a poor hedge against inflation.   
    D. Common stocks are avoided because they usually are a poor hedge against inflation.

    Property-casualty companies invest fairly heavily in common stocks in order to hedge against inflation.
    (this multiple choice question has been scrambled)
  15. All the following statements concerning the impact of recent events on property-casualty companies are correct, EXCEPT:
    (RM 518) 

    A. During prosperity, claim costs tend to increase because of the inflation factor.   
    B. The earnings and sales revenues of U.S. insurers tend to reflect the ups and downs of the business cycle. 
    C. Insurers from outside the U.S. have become an increasing threat to U.S. companies.   
    D. The increased presence of captive insurers has been a favorable development for property-casualty companies.   
    D. The increased presence of captive insurers has been a favorable development for property-casualty companies. 

    The increased use of captive insurance companies by business organizations has increased the competitiveness of the U.S. property-casualty insurance business and caused a loss of premium and investment income for conventional property-casualty insurers.
    (this multiple choice question has been scrambled)
  16. Which of the following statements concerning consumer finance companies is (are) correct?
    (RM 519-520)

    I             Known as small loan companies, they make risky installment loans to consumers for cars, appliances, and other purposes and charge higher rates than other installment lenders.

    II            They do not make cash loans, but they do support the purchase of specific items that are sold by their parent companies. 

    A. II only   
    B. I only   
    C. Both I and II   
    D. Neither I nor II 
    B. I only 

    II is incorrect because it describes sales finance companies, not consumer finance companies. Consumer finance companies certainly do make cash loans, as stated in I.
    (this multiple choice question has been scrambled)
  17. All the following statements concerning sales and commercial finance companies are correct, EXCEPT:
    (RM 519-521) 

    A. Dealers who fill out contracts for installment loans often sell the contracts immediately to a sales finance company.   
    B. Many sales finance companies are "captives" operated by producers or dealers to promote sales of their products.   
    C. Commercial finance companies lend cash to firms to finance inventories, equipment, or other real or financial assets. 
    D. Commercial finance companies confine their lending to businesses for the business firms’ accounts receivable or for the factoring or purchase of the accounts receivable at a discount.   
    D. Commercial finance companies confine their lending to businesses for the business firms’ accounts receivable or for the factoring or purchase of the accounts receivable at a discount.   

    Commercial finance companies focus principally on loans to businesses, but they do much more than just accounts receivable financing. They make loans for inventory and equipment purchases as well as short-term unsecured loans. They also provide loans and leasing arrangements for businesses wanting to acquire large capital equipment items such as airplanes and railroad cars.
    (this multiple choice question has been scrambled)
  18. All the following statements concerning finance companies are correct, EXCEPT:            (RM 519-522) 

    A. Finance companies have recently felt rising competition from banks and credit unions. 
    B. Few finance companies are diversified; most specialize in one category of activity, installment loans.   
    C. Finance companies operate leasing plans and make loans for working capital and long-term investment.   
    D. The larger finance companies are active in both consumer sales and commercial finance activities.   
    B. Few finance companies are diversified; most specialize in one category of activity, installment loans.

    Most finance companies offer a wide variety of types of loans to businesses as well as to individuals.
    (this multiple choice question has been scrambled)
  19. All the following statements concerning the financial services provided by security dealers and investment bankers are correct, EXCEPT:
    (RM 523-524) 

    A. Security dealers generally hold an inventory of the securities in which they maintain a market.   
    B. Many security dealers also serve as investment bankers.   
    C. Investment bankers give issuers of new securities advice and counsel concerning the terms and timing of new issues. 
    D. Investment bankers increase their risk by forming syndicates, but the profit potential usually justifies the increased risk.   
    D. Investment bankers increase their risk by forming syndicates, but the profit potential usually justifies the increased risk.   

    Creation of a syndicate reduces the risk to an investment banker by reducing its financial commitment in the new securities being issued and by expanding the sales force for the securities.
     
    (this multiple choice question has been scrambled)
  20. Which of the following statements concerning mortgage banking is (are) correct?
    (RM 523-524)

    I             Mortgage bankers are primarily long-term investors in mortgage loans.

    II            A rise in the market rate of interest means an increased profit for the mortgage banker if the bank disposes of its mortgage loans during the period of increased interest rates. 

    A. Both I and II   
    B. I only   
    C. Neither I nor II 
    D. II only   
    C. Neither I nor II 

    I is incorrect because mortgage bankers are primarily short-term investors in mortgage loans, selling them to long-term mortgage investors soon after buying the mortgage loans. II is incorrect because if interest rates rise during the mortgage banker’s short holding period, the resale value of the mortgages will fall.
     
    (this multiple choice question has been scrambled)
  21. Which of the following statements concerning real estate investment trusts (REITs) is (are) correct?
    (RM 524)

    I             To maintain their tax-exempt status they must receive at least 75% of their gross income from real estate transactions.

    II            To maintain their tax-exempt status they must devote at least 75% of their assets to investment in residential real estate. 

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    A. I only 

    A REIT must receive at least 75 percent of its income from real estate transactions. II is incorrect, however, because the permissible real estate transactions include not just the ownership of residential real estate but also the ownership and selling of income-producing property and mortgages.
     
    (this multiple choice question has been scrambled)
  22. How do mortgage bankers differ from real estate investment trusts (REITs)?
    (RM 525) 

    A. REITs invest on a shorter-term basis.   
    B. Mortgage bankers invest on a shorter-term basis.   
    C. REITs make their profit from a rapid turnover of their inventories of assets. 
    D. Mortgage bankers take no risks.   
    B. Mortgage bankers invest on a shorter-term basis.   

    REITs are longer-term investors than mortgage bankers, so B and D are incorrect. C is incorrect because mortgage bankers do take risks.
    (this multiple choice question has been scrambled)
  23. All the following are among the long-term trends affecting financial institutions today, EXCEPT:
    (RM 526-527) 

    A. Consolidation   
    B. Diversification of services   
    C. Increased government regulation 
    D. Technological revolution   
    C. Increased government regulation 

    Financial institutions have operated in an environment of generally reduced government regulation in recent years.
    (this multiple choice question has been scrambled)
  24. Which of the following statements concerning the regulation of pension plans is correct?
    (RM 558-559) 

    A. PBGC insures both defined contribution plans and defined benefit plans.   
    B. The cost of PBGC insurance does not reflect a pension plan’s level of risk. 
    C. PBGC insures defined contribution plans but not defined benefit plans.   
    D. New laws are needed to require employers to fully fund past pension plan liabilities.   
    B. The cost of PBGC insurance does not reflect a pension plan’s level of risk. 

    PBGC faces a problem in that the riskier pension plans tend to subsidize the safer plans because the insurance premium schedule does not adequately reflect the level of risk of a plan.   ERISA currently requires employers to fund past pension plan liability fully so a new law is not required. PBGC insures defined benefit plans and not defined contribution plans.
     
    (this multiple choice question has been scrambled)
  25. Which of the following statements concerning hedge funds is correct?
    (RM 560)

    I             They are investment companies closely regulated by the SEC.

    II            They invest in risky assets usually only for high net worth customers. 

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II
    B. II only Hedge funds are virtually free of government regulation and are not subject to the regulation of the SEC.

    Hedge funds make risky investments and are usually open only to high net worth customers.
     
    (this multiple choice question has been scrambled)

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