Function, Purpose and Regulation of Financial Institutions

Question 1

Deposit-Type Financial Institutions

Answer 1

provide traditional checking and savings accounts.

Question 2

Non-Deposit-Type Financial Institutions

Answer 2

are financial institutions other than banks.

Question 3

Offer the most services and branch offices to customers.

Answer 3

Commercial Banks:

Question 4

Savings and Loan Associations:

Answer 4

Can be either mutual or corporate. Depositors earn dividends in a mutually owned S&L and interest in a corporate owned S&L. They loan most of the deposits out as mortgages.

Question 5

____ are not-for-profit cooperatives, also owned by depositors. They have tax advantages over other types of banks.
Bank Services and Charges: To compete in today’s investment environment banks offer a wide variety of services to make it convenient to deposit and withdraw funds.

Answer 5

Credit Unions

Question 6

FDIC insurance guarantees up to _____ of deposits per depositor per account type.

FDIC guarantees up to ____ for joint accounts for spouses.

Answer 6

$250,000

$500,000

Question 7

Savings Bank:

Answer 7

Similar to a mutual S&L, they are mostly depositor owned.

Question 8

______ insures deposits at commercial banks and S&Ls, and the National Credit Union Association (NCUA) insures credit unions. These are federal agencies established to protect you against failures involving financial institutions.

Answer 8

The Federal Deposit Insurance Corporation (FDIC)

Question 9

_____ is a savings account alternative offered by commercial banks. Like a savings account, you can deposit or withdraw your money in a bank on-demand.

Answer 9

Money Market Deposit Account

Question 10

Advantages and Disadvantages of a Savings Account

Answer 10

The advantages of a savings account are:
It is convenient - easily accessible and simple to operate. A fixed return is guaranteed.
The disadvantages are:
It is less liquid and therefore more risky than a checking account, in that you must go to the bank to withdraw your funds, and the bank could require a grace period before relinquishing the funds. It has a relatively low interest rates compared to other liquid investments.

Question 11

Within a ____ S&L, depositors receive interest rather than dividends, just like in a commercial bank.

Answer 11

Corporate-

Question 12

in a ____S&L, depositors are the owners. They receive dividends rather than interest on savings.

Answer 12

Mutual-

Question 13

Banks serve two functions:

Answer 13

They take deposits and make loans.

Question 14

Benefits of Credit Unions

Answer 14

Have a “cost” advantage over other financial institutions.
Are tax-exempt because of their “not-for-profit organizations” status.
Function on a smaller scale and are generally more efficient.
Pay more than depositors would otherwise earn at a commercial bank.
Have lower fees and minimum balances associated with their accounts.

Question 15

The ____ is the percentage margin of collateral that must be maintained in the account for a securities purchase.

Answer 15

maintenance margin

Question 16

____ are when investors purchase securities for full price, whereas investors with ____ leverage their position by borrowing money for their transactions from the brokerage firms.

Answer 16

Cash accounts
margin accounts

Question 17

An is ____ a comprehensive financial service package offered by a brokerage firm, which can include a checking account, credit and debit cards, an MMMF, loans, automatic payment of fixed payments and a system for the direct payment of interest or dividends.

Answer 17

asset management account

Question 18

____ allow investors to finance the purchase of a security. In doing so, the investor can magnify their return if the security appreciates in value.

Answer 18

Margin accounts

Question 19

Federal regulation requires a _____ % initial margin. Some brokerage firms may require more. When a security drops in price causing the investor’s equity amount to go below the maintenance margin requirement, he or she will receive a margin call to make up the difference.

Answer 19

50%

Question 20

Types of Brokers:

Answer 20

Full service, discount, and deep discount. They differ in the fees they charge and the level of advice/service provided.

Question 21

Cost of Trading:

Answer 21

The cost of trading can be significantly different between full service and discount for large trades. Other charges to be aware of are inactive account and transaction fees.

Question 22

Asset Management Account:

Answer 22

Some brokerage firms offer a multi-purpose account where investors can consolidate all of their financial needs, including banking and investing.

Question 23

Online Trading:

Answer 23

There is a rising trend of self-directed investors using deep discount Internet brokers to facilitate their transactions.

Question 24

Securities Investment Protection:

Answer 24

Provides coverage for investors in case of failure of the broker/dealer.

Question 25

The major advantage of such an asset managment account is

Answer 25

that it automatically coordinates the flow of funds into and out of your money market mutual fund.

Question 26

Each of the following are benefits of an automatic investment plan, except?

Answer 26

Direct deposits from your bank account
Move excess funds between accounts
Can establish automatic withdrawal

Question 27

Which class of mutual fund shares typically has a contingent deferred sales charge?

Answer 27

Class B shares typically have a contingent deferred sales charge.

Question 28

____ privileges associated with money market mutual funds are valuable when you need to use money directly from your investments to fund a large purchase or provide support during an emergency.

Answer 28

Check writing

Question 29

A mutual fund ….

Answer 29

is an investment vehicle tended by professional managers that raises funds from investors by pooling their money and investing in stocks, bonds, and other asset classes. These investments are based on specific objectives and risk metrics.

Question 30

Some funds designed for long-term investment charge ___ to discourage investors from leaving too early. The proceeds of the fee go back into the pool of investment for the other shareholders.

Answer 30

redemption fees

Question 31

Load fees for mutual funds are based on a percentage of the Net Asset Value (NAV). what is the calculation?

Answer 31

NAV = (Total value of the fund’s assets - liabilities) ÷ number of outstanding shares.

Question 32

Loaded Funds will charge ____ for the purchase, and sometimes sale, of the fund’s shares. These loads could be charged in the beginning (Front Load), annually (Level Load), or when the shares are sold within a certain time (Contingent Deferred Sales Charge or Back Load).

Answer 32

commission

Question 33

Finally, some funds charge a ____ to compensate for the distribution and marketing of the fund.

Answer 33

12b-1 fee

Question 34

An ____ plan allows an investor to take advantage of investing small amounts on a systematic basis to a mutual fund account from their bank account, or to set up a regular distribution to pay off a bill or to supplement their income.

Answer 34

automatic investment

Question 35

Automatic Investment and Withdrawl Plans

Answer 35

Make regular deposits directly from your bank account.
Employ dollar-cost averaging (DCA) when investing in a mutual fund.
Move excess funds from a money market account into the stock market.
Withdraw a dollar amount or a percentage of your mutual fund account on a monthly basis under an automatic or systematic withdrawal plan.

Question 36

The ____ allows an investor to transfer their investments among a company’s different funds

Answer 36

exchange privilege

Question 37

All _____ charge a management fee as compensation for managing the fund.

Answer 37

mutual funds

Question 38

_____ underwrite securities sold by companies in the primary market.

Answer 38

Investment Banks

Question 39

_____ sometimes known as Investment Management Firms, advise or manage mutual funds, pension funds or other pools of assets. Their clientele include individuals, companies, and governments.

Answer 39

Asset Management Firms

Question 40

Which of the following financial institutions help companies raise capital?

Answer 40

investment Banks.
Venture Capital Firms

Question 41

____ raise funds for start-up companies

Answer 41

Venture Capital Firms

Question 42

Each employee has an account into which the employer, and usually the employee, make regular contributions. The employee defines how much is put into the plan. At retirement, the employee receives a benefit whose size depends on the accumulated value of the funds in the retirement account.

Answer 42

Defined contribution-

Question 42

The employee’s pension benefit is determined by a formula that takes into account years of service to the employer. In most cases, it also includes salary or wages. The amount the employee receives is defined for him or her. The most common formulas used to determine the benefit are flat amount, flat percentage, and unit credit.

Answer 42

Defined benefit-

Question 43

Pension and Retirement Funds have 2 plans

Answer 43

Defined contribution
Defined benefit

Question 44

____ are firms whose primary function is to help businesses, governments, and other entities raise funds to finance their activities by issuing securities. Investment banks also facilitate, and sometimes initiate, mergers of firms or acquisitions of one firm by another.

Answer 44

Investment banks

Question 45

___ are financial institutions that may be associated with, or owned by, a commercial bank. They provide a wide range of services to individuals and corporations.

Answer 45

Trust companies

Question 45

____ can act as fiduciaries for the trust beneficiaries.

Answer 45

trust departments

Question 46

The _____ is the primary investigator and prosecutor of insider trading.

Answer 46

SEC

Question 47

The SEC NOT have jurisdiction over___

Answer 47

Credit Unions

Question 48

_______ main function is to promote economic stability by preventing a breakdown in part or all of the financial system. Some of their functions include, guaranteeing farmers’ debt instruments, guaranteeing loans to students, and protecting bank accounts.

Answer 48

Special-purpose intermediaries’

Question 49

The logic behind dollar cost averaging is that by investing the same dollar amount on a regular basis, more mutual fund shares are purchased when the price is low and fewer are bought when the price is high.

Answer 49

Dollar Cost Averaging (DCA) approach.

Question 50

Interest-bearing checking account is a negotiable order of withdrawal _____ account. These ___ accounts are simply checking accounts on which you earn interest on your balance.

Answer 50

NOW
NOW

Question 51

The governing federal insurance law is the ______ which turns over the regulation of the insurance industry to the states.

Answer 51

McCarran-Ferguson Act of 1945 (Public Law 15)

Question 52

A savings account is also called a ___ or ____ account.

Answer 52

time deposit
a passbook

Question 53

______ execute the country’s monetary policies, including manipulation of interest rates and money supplies.

Answer 53

Central banks (the Fed)

Question 54

Structure of the Federal Reserve System

Answer 54

Board of Governors
FOMC
Board of Directors
Reserve Banks

Question 55

____ is a self-regulatory body that operates subject to Securities and Exchange Commission oversight,

Answer 55

Financial Industry Regulatory Authority (FINRA).

Question 56

Regional and World Organizations

Answer 56

Several international bodies currently exist for the purpose of coordinating the financial policies of national governments.
The most important is Bank for International Settlements (BIS) in Basel, Switzerland, whose objective is to promote uniformity of banking regulations.

Question 57

two official international agencies operate in the international financial markets to promote growth in trade and finance:

Answer 57

the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank).

Question 58

______ is issued when the current account value falls below the required minimum overall level?

Answer 58

Minimum Equity Call