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  1. Shares of investment companies are generally not very liquid.

    a) True
    b) False
    b) False

    Investment company shares are highly liquid. Open-end shares are redeemable on a day's notice at their net asset value, and closed-end shares can be sold in the market at current prices in the same way that shares of common stock are sold.
  2. Hedge funds are typically partnerships.

    a) True
    b) False
    a) True

    Hedge funds are partnerships that follow a high-risk investment strategy.
  3. Investment companies are taxed on the full amount of their income each year, regardless of whether the income is distributed to the shareholders.

    a) True
    b) False
    b) False

    If investment companies fully qualify, their tax status is highly favorable. If they distribute to shareholders at least 90 percent of investment income and capital gains as required, shareholders (rather than the companies themselves) are taxed.
  4. The essential distinction between open-end and closed-end investment companies is that the former sells or redeems outstanding shares at any time, whereas the latter sells only a specific number of shares and does not redeem them from the shareholders who wish to sell.

    a) True
    b) False
    a) True

    The statement correctly describes the distinction between open-end and closed-end investment companies.
  5. Mutual funds provide their principal benefits to very large investors rather than small ones.

    a) True
    b) False
    b) False

    It is doubtful that mutual funds provide significant benefits to large institutional investors. They may be of significant help to small investors, however, by reducing information and transaction costs and opening up investment opportunities not otherwise available.
  6. Pension funds are long-term investors with only a limited need for liquidity.

    a) True
    b) False
    a) True

    Since their inflow and outflow of funds is fairly predictable, pension funds can invest a large portion of their assets in long-term investments; their need for liquidity is small.
  7. Private pension funds invest a large proportion of their total assets in common stock.

    a) True
    b) False
    a) True

    Private pension funds invest over 40 percent of their assets in corporate stock, and another 20 percent in mutual funds.
  8. Most experts think that the rapid growth of pension fund assets may be over.

    a) True
    b) False
    b) False

    Most experts think the rapid growth of pension fund assets may continue to be fast-paced, although their problems and costs may also grow rapidly.
  9. Life insurance companies invest the bulk of their funds in long-term securities.

    a) True
    b) False
    a) True

    Long-term securities-bonds, stocks, and mortgages-make up the major portion of the life insurance industry's investment portfolio.
  10. The primary source of income (revenue) of a typical U.S. life insurance company is earnings from investments.

    a) True
    b) False
    b) False

    The primary source of income (revenue) is policyholder premium payments, which are more than double the amount of investment earnings.
  11. Most U.S. life insurance companies are mutual companies.

    a) True
    b) False
    b) False

    The majority of U.S. life insurance companies are stock companies, though mutual companies are much larger and older on average.
  12. Universal life insurance allows the customer to change the face amount of the policy.

    a) True
    b) False
    a) True

    An attractive feature of universal life is that it allows the customer to change the face amount of the policy and the size and timing of premium payments.
  13. Property-casualty insurance companies have earned most of their profits from their underwriting activities rather than their investment activities in recent years.

    a) True
    b) False
    b) False

    Most of the profits of property-casualty insurance companies have come from investing. The underwriting side of the business has frequently been highly unprofitable in recent years.
  14. Loans made by consumer finance companies are considered riskier than similar loans made by banks, credit unions, and savings and loan associations; therefore, they carry a higher finance charge.

    a) True
    b) False
    a) True

    Finance companies generally accept higher-risk borrowers than do banks and S&Ls, and must charge higher interest rates to compensate for the added cost of doing business.
  15. Sales finance companies are frequently owned by a manufacturer of consumer durable goods.

    a) True
    b) False
    a) True

    Sales finance companies are often controlled by the dealer or manufacturer, and are typically referred to as captive finance companies.
  16. Commercial finance companies focus primarily on making small loans to individuals for the purchase of automobiles and home appliances.

    a) True
    b) False
    b) False

    Commercial finance companies focus mainly on making loans to businesses, while consumer finance companies are primarily involved in lending to individuals.
  17. In recent years, finance companies have been growing rapidly in their market share of consumer installment loans versus the market share of banks and nonbank thrift institutions.

    a) True
    b) False
    b) False

    Both commercial banks and nonbank thrift institutions have been capturing a larger share of the consumer installment loan market at the expense of finance companies.
  18. Finance companies raise a large proportion of their total capital through the issuance of debt instruments.

    a) True
    b) False
    a) True

    Since they lack depositors as a source of funds, finance companies depend heavily on the sale of debt instruments, which typically supplies 50 percent of their funds.
  19. During the past two decades, the number of finance companies in the United States has risen sharply.

    a) True
    b) False
    b) False

    Since 1960 the number of finance companies has been declining by more than 80 percent, though their average size has been growing.
  20. An investment bank is an organization that assists in the marketing of new issues of securities.

    a) True
    b) False
    a) True

    Investment bankers market new securities on behalf of governments, government agencies, and corporations.
  21. Real estate investment trusts (REITs) invest most of their available funds in real estate and mortgage loans.

    a) True
    b) False
    a) True

    They are required by law to receive at least 75 percent of their gross income from real estate transactions.
  22. The Pension Benefit Guaranty Corporation insures all private-sector pension benefits.

    a) True
    b) False
    b) False

    The PBGC provides coverage only for some vested benefits in defined-benefit plans; it does not insure benefits provided by defined-contribution plans.
  23. Investment companies are heavily regulated at the federal level.

    a) True
    b) False
    a) True

    Investment companies are federally regulated by the Investment Company Act and the Investment Advisers Act as well as the SEC.
  24. Which of the following statements concerning private pension funds is correct?

    A) They have grown very rapidly since 1980B) They are largely unregulated.   
    C) They have highly unpredictable cash flows.   
    D) They are likely to grow very rapidly during the next 20 years.
    A) They have grown very rapidly since 1980

    • Private pension funds are heavily regulated, particularly as a result of ERISA. 
    • Their cash in-flows and outflows are highly predictable. 
    • The aging of the population will slow the growth of pension fund assets.
  25. The largest percentage of the assets of U.S. property-casualty insurance companies is invested in which of the following?

    A) federal agency securities 
    B) security repurchase agreements 
    C) state and local government securities
    D) commercial mortgages 
    C) state and local government securities

    The others are incorrect because federal agency securities, commercial mortgages, and security repurchase agreements each constitute a small percentage of property-casualty insurance company assets.
    (this multiple choice question has been scrambled)
  26. An organization whose primary business is to make indirect loans to consumers by purchasing installment paper from automobile dealers is a

    A) consumer finance company 
    B) sales finance company 
    C) commercial finance company 
    D) commercial paper dealer
    B) sales finance company

    Consumer finance companies make direct personal loans to individuals.
    Commercial finance companies focus mainly on making loans to businesses. 
    Commercial paper dealers are organizations that assist businesses in marketing commercial paper.
    (this multiple choice question has been scrambled)
  27. Which of the following asset categories accounts for the largest amount of U.S. life insurance company investments?

    A) loans to policyholders
    B) corporate and foreign bonds 
    C) real estate mortgages 
    D) U.S. Treasury securities 
    B) corporate and foreign bonds

    For example, in 2006, the latest year for which the text provides data, corporate and foreign bonds constituted approximately 42percent of the assets of U.S. life insurance companies.

    The others are incorrect because mortgages constituted about 6.4 percent, U.S. Treasury securities about 10.4 percent, and loans to policyholders less than 2.4 percent.
    (this multiple choice question has been scrambled)
  28. Which of the following is the largest source of revenue for the federal government?

    A) corporate income taxes 
    B) social insurance taxes 
    C) individual income taxes 
    D) estate and gift taxes
    C) individual income taxes

    For example, it is estimated that, for 2000, individual income taxes will produce about 45 percent of the federal government's revenues.

    The others are incorrect because corporate income taxes will produce about 11 percent, social insurance taxes such as FICA will produce about 37 percent, and estate and gift taxes will account for less than one percent of the federal government's revenues.
    (this multiple choice question has been scrambled)
  29. Which of the following statements concerning U.S. life insurance companies is (are) correct?

    I. The majority of U.S. life insurance companies are stock companies.

    II. On the average, U.S. mutual life insurers are much smaller than U.S. stock life insurance companies.

    (A) Both I and II   
    (B) I only   
    (C) II only   
    (D) Neither I nor II
    (B) I only

    II is incorrect because, on average, U.S. mutual life insurance companies are much larger than U.S. stock life companies.
    (this multiple choice question has been scrambled)
  30. Which of the following statements concerning pension funds is (are) correct?

    I. They are primarily long-term investors.

    II. They have a limited need for liquidity.

    A) II only 
    B) Neither I nor II
    C) I only 
    D) Both I and II 
    D) Both I and II
    (this multiple choice question has been scrambled)
  31. All the following statements concerning open-end or closed-end investment companies are correct EXCEPT

    A) Open-end investment companies are often called mutual funds.   
    B) Closed-end investment companies' shares usually trade on a stock exchange.    C) The amount of an open-end investment company's shares outstanding changes continuously.   
    D) Closed-end investment companies may be either load funds or no-load funds.
    D) Closed-end investment companies may be either load funds or no-load funds.

    Open-end companies can be load funds or no-load funds. The shares of a closed-end investment company sell at prices determined by the supply and demand for them. Normal stock brokerage commissions are charged for their purchase or sale.

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