Final

Question 1

With the ___________________, premiums are invested in stock, bond, or money market funds, and the value of the policy changes in accordance with investment performance.

Answer 1

Variable life insurance

Question 2

The largest item on the liability side of the balance sheet for life insurance companies is:

Answer 2

Policy reserves

Question 3

The __________________ combines pure life insurance with a savings element. If the insured lives to some specified time, he/she receives the policy’s face value.

Answer 3

Endowment life policy

Question 4

In property/casualty insurance, the actual losses incurred on an insurance line, divided by the premiums earned, is called the:

Answer 4

Loss ratio

Question 5

A/an _________________ will pay a beneficiary a fixed amount, periodically, over some specified period of time.

Answer 5

Annuity

Question 6

Loans made by a life insurance company to its own policy holders are called:

Answer 6

Policy loans

Question 7

Consider Justin PC Insurance Company’s data:

Loss ratio 75%
Expense ratio 31%
Dividend ratio 1%
Net investment income/premiums earned 8%

Compute Justin’s “combined ratio after dividends.”

Answer 7

107

Question 8

The customers most eager to apply for an insurance contract will be those most likely to have a claim against the insurance company. This is the essence of the _______________ problem in insurance.

Answer 8

Adverse selection

Question 9

Life insurance companies show a tendency to have:

Answer 9

Long term assets and long term liabilities

Question 10

Major lines of property-casualty insurance would include all of the following except:

Answer 10

Universal variable life

Question 11

_______________ is essentially insurance acquired by insurance companies.

Answer 11

Reinsurance

Question 12

Trusted Securities is taking an order from Paul, who wants to acquire 300 shares of General Electric stock. Trusted Securities is acting in the capacity of a/an:

Answer 12

Broker-dealer

Question 13

_____________ refers to a professionally managed pool of money directed to the financing of newer, often higher-risk firms. The investors are taking an equity position, and are not passive investors.

Answer 13

Venture capital

Question 14

Darlene tries to spot situations where the same basic security is selling for two different prices in two different markets. She wants to buy at the cheaper price and immediately sell at the more expensive Darlene is trying to engage in:

Answer 14

Pure arbitrage

Question 15

The ____________________ is the key Federal regulator of securities transactions.

Answer 15

SEC

Question 16

With __________________, corporations can register new securities with the SEC up to two years in advance, and be prepared to issue them on relatively short notice.

Answer 16

Shelf registration

Question 17

Suppose an investment bank promises an issuing firm a fixed amount for a new issue of stock. Then, the investment bank intends to sell the stock to the public. This exemplifies a/an _________________ arrangement.

Answer 17

Firm commitment underwriting

Question 18

Insurance companies, commercial banks and investment banks may now affiliate with each other and engage in similar lines of business. These powers were granted by the

Answer 18

Financial services modernization Act

Question 19

The _______________ protects investors against losses of up to $500,000, resulting from securities firm failures.

Answer 19

SIPC

Question 20

When a securities firm helps support a secondary market for an asset, it is involved in:

Answer 20

Market making

Question 21

One kind of mutual fund deploys its funds in short-term instruments, including such things as Treasury bills, commercial paper, and large CDs. This is the:

Answer 21

Money mutual market fund

Question 22

The number of shares outstanding for a mutual fund is determined by customer demand for the shares; hence, mutual funds are referred to as:

Answer 22

Open end

Question 23

A “growth” mutual fund would be expected to purchase:

Answer 23

Stocks

Question 24

A “no-load mutual fund” is:

Answer 24

typically marketed directly to customers, charging no commission.

Question 25

Which of the following is most obviously not a long-term fund?

Answer 25

Tax exempt money market mutual fund

Question 26

A mutual fund prospectus:

Answer 26

indicates the investment objectives of the fund

Question 27

A “hybrid” fund is one that:

Answer 27

invests in both bonds and stocks

Question 28

So-called 12b-1 fees are:

Answer 28

Fees charged by some mutual funds, due to distribution and marketing costs

Question 29

If we divide the current value of a mutual fund’s investment portfolio by the number of the mutual fund’s own shares outstanding, we have:

Answer 29

The net asset of the fund

Question 30

A mutual fund that charges a commission or fee on its sales of shares to is classified as a/an:

Answer 30

Load fund

Question 31

A mutual fund that invests solely in stocks would be categorized as a/an:

Answer 31

Equity fund

Question 32

A large number (about 25%) of long-term mutual funds are _____________ funds, buying securities in proportions similar to those of a major stock index.

Answer 32

Index

Question 33

Open end mutual funds guarantee

Answer 33

Investors a minimum NAV

Question 34

As the economy weakens, one would expect investment in _________ funds to increase and investment in __________ funds to decrease, ceteris paribus.

Answer 34

Money market mutual

Equity

Question 35

Money market mutual funds (MMMFs) have caused disintermediation at banks at times. This is because MMMFs

Answer 35

Sometimes pay higher interest rates than bank deposits

Question 36

The largest proportion of long term mutual fund assets is held by ___________________.

Answer 36

The household sector

Question 37

The primary regulator of mutual funds is the

Answer 37

SEC

Question 38

Which one of the following fund types is likely to have the lowest annual expense ratio?

Answer 38

Index fund

Question 39

A ___________ fund must hold substantial cash reserves in order to meet fund redemptions from shareholders.

Answer 39

Open end mutual fund

Question 40

A fund that has a fixed number of shares outstanding and is traded on an exchange is called a/an

Answer 40

Close end fund

Question 41

ETFs have several advantages over index funds including the ability to:

I. Trade throughout the day at continuously updated prices
II. Purchase ETF shares on margin
III. Sell ETF shares short
IV. Sell the shares back to the fund

Answer 41

I, II and III only

Question 42

An unregistered issue sold to a few large institutional buyers is an example of a

Answer 42

Private placement

Question 43

An investment banker may be unwilling to engage in a firm commitment offer if

Answer 43

Both A and C

Question 44

In July 2002 the U.S. Congress passed the Sarbanes-Oxley bill. Among other things, this bill

I. Created an independent auditing oversight board run by the SEC
II. Increased penalties for corporate wrongdoers
III. Eliminated the use of stock options for executive compensation

Answer 44

I And II only

Question 45

As a result of the alleged conflicts of interest between analysts and underwriting, which of the following rules changes were implemented?

I. Analysts cannot participate nor attend certain presentations to potential investors conducted by investment bankers associated with underwriting an issue
II. Analyst compensation can no longer be tied to the amount of underwriting business a firm generates
III. Securities firms must divest stock research divisions to ensure independence from their investment banking business.

Answer 45

I and II only

Question 46

Which one of the following securities firms’ activities is normally the most risky?

Answer 46

Firm commitment offering

Question 47

The term “variable” in a variable life policy refers to the

Answer 47

Variable growth rate of the cash value of the policy

Question 48

The primary regulator of insurance firms is the

Answer 48

State insurance regulator

Question 49

Which one of the following statements concerning annuities offered by insurers is not true?

Answer 49

Annuity payments must cease upon the policyholder’s death

Question 50

The largest asset category of life insurers is _____ and the largest liability category is _____.

Answer 50

Bonds

Policy reserves

Question 51

Property and casualty insurers hold _____ short term assets than life insurers because property and casualty loss rates are _____ predictable than life insurance loss rates.

Answer 51

More

Less

Question 52

In property and casualty insurance the combined ratio is equal to the ____________________ divided by total premiums written.

Answer 52

Sum of the loss ratio plus general expenses and broker’s commissions

Question 53

The two major components of expense risk for P&C insurers are

Answer 53

Loss adjustment expenses and variations in commission and other expenses

Question 54

In the mid-2000s, a number of banks lost billions of dollars on failing mortgage loans. The risk of such occurrences would be categorized as:

Answer 54

Credit risk

Question 55

Bank-X’s outstanding loans all have fixed interest rates, with maturities in excess of two years. The bank’s deposit liabilities all have maturities of no more than six months. Bank-X most obviously is facing:

Answer 55

Interest rate risk

Question 56

Which of the following would bring about “off balance sheet” risk for a financial institution?

Answer 56

A bank issues a letter of credit

Question 57

Suppose a bank is holding a portfolio of long-maturity assets, and has financed it with short-maturity liabilities. Which of the following risks is most obvious?

Answer 57

Refinancing risk

Question 58

We’ve encountered so-called “subprime” loans, which have been especially newsworthy over the last year or two. These are:

Answer 58

Loans to higher-risk borrowers.

Question 59

A/an ________________ can be viewed as a multi-class pass-through security, arising when mortgage loans are securitized.

Answer 59

collateralized mortgage obligation

Question 60

Freddie Mac” and “Fannie Mae” are important institutions that came up in connection with:

Answer 60

securitization of mortgage loans

Question 61

If a mortgage loan is called “conventional,” this means that the loan:

Answer 61

is not a VA or FHA mortgage.

Question 62

With a fixed rate mortgage the _____ bears the interest rate risk and with an ARM the ______ bears the interest rate risk.

Answer 62

Lender

Borrower

Question 63

Mortgage payments are _____ on a 15 year fixed rate mortgage than on a 30 year fixed rate mortgage, and _____ is paid on a 15 year mortgage than on a 30 year mortgage, ceteris paribus

Answer 63

Higher

Less interest

Question 64

_____________ are specialized investment funds established to invest in distressed loans.

Answer 64

Vulture funds

Question 65

A/an ________________ is similar to a “pass through” security, but it assigns different combinations of risk and return to various investor groups.

Answer 65

CMO

Question 66

In the loan sale market, a bank buying a/an __________________ faces risks from the borrower as well as from the original lending institution.

Answer 66

Loan participation

Question 67

With a _________________bond, mortgage loans are serving as collateral for the bond, but the bond’s interest and principal payments are not necessarily directly connected to the mortgage payments.

Answer 67

Mortgage backed

Question 68

If the Fed is targeting interest rates and money demand increases an appropriate policy response would be to

Answer 68

Buy U.S. Treasury securities from government bond dealers

Question 69

A decrease in reserve requirements could lead to a(n)

Answer 69

Both A and B

Question 70

If the Fed wishes to stimulate the economy it could

I. Buy U.S. government securities
II. Raise the discount rate
III. Lower reserve requirements

Answer 70

I and III only

Question 71

Benjamin Investments is actively acquiring the stock of Android Corp., after concluding that Android is a likely candidate for a buyout by another firm. If a buyout is, in fact, announced, Benjamin feels that Android’s stock price will rise significantly. This kind of activity would be categorized as _____________ by Benjamin Investments.

Answer 71

Risk arbitrage

Question 72

BONUS Actively managed funds find it difficult to consistently earn higher risk adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following?

I. Lower expense ratios at index funds
II. Higher turnover ratios at index funds
III. Differences in returns in sectors of the market and the overall market return

Answer 72

I and III only

Question 73

You wish to invest $17,445 in a mutual fund with a NAV of $26.03. The fund charges a front end load of 4.50%. How many fund shares will you receive?

Answer 73

640

Question 74

________________ has had an important influence on types of merger and acquisition transactions involving securities firms in recent years. In particular, we’ve observed a number of securities firm combinations involving other financial firms, like insurance companies and banks.

Answer 74

The Financial Services Modernization Act

Question 75

In 2007 and 2008, mortgage delinquencies and foreclosures increased, leading to:

Answer 75

A collapse in the value of mortgage backed securities

Question 76

BONUS _____________ refers to the incentive for sellers of loans to offload their “bad” loans, while retaining their “good” ones.

Answer 76

Moral hazard

Question 77

BONUS The propensity of mortgage borrowers to _______________________ means that realized cash flows on pass-through securities can deviate from the stated coupon flows.

Answer 77

Prepay their mortgage

Question 78

Bonus In November 2010 the Fed announced that it would buy $600 billion in long-term Treasuries over the next eight months. The bond purchases aimed at stimulating the economy. The policy is called __________.

Answer 78

Quantitative easing