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This pack of ECO 316 Week 2 Chapter 12 What Financial Institutions Do shows the solutions to the following problems:
12.1 Multiple Choice Questions
1) Which of the following is NOT one of the three largest financial institutions in the world?
2) Which of the following is a securities market institution?
3) Which of the following is an investment institution?
4) Which of the following is a contractual saving institution?
5) Which of the following is a depository institution?
6) Securities market institutions
7) Which of the following had the largest percentage of total assets of financial intermediaries in the United States?
8) Which of the following increased its share of the percentage of total assets of financial intermediaries by the most between 1960 and 2006?
9) Which of the following decreased its share of the percentage of total assets of financial intermediaries between 1960 and 2006?
10) Why are securities market institutions not considered to be financial intermediaries?
11) Investment banks
12) Underwriting involves
13) In investment banking the “spread” is the difference between
14) If an investment bank underwrites an issue on an “all-or-none” basis,
15) If an investment bank underwrites an issue on a “best efforts” basis,
16) A syndicate is
17) Which of the following is not a leading underwriting firm?
18) The most important service provided by underwriters is
19) Why was the Securities and Exchange Commission established?
20) Why did the risks associated with underwriting bond issues rise during the 1980s?
21) SEC Rule 415
22) SEC Rule 415
23) All of the following statements about junk bonds are true EXCEPT
24) Merchant banking refers to
26) A “tombstone” is a
27) Unlike brokers, dealers
28) Securities dealers make most of their income from
29) The largest firms in securities markets
30) By 2006, the primary growth area for investment banking was
31) Many issuers of stocks and bonds use underwriters for all of the following reasons EXCEPT
32) Buying and selling securities on the basis of insider information is against the law
33) What was the “big bang”?
34) All of the following are part of Euronext (an integrated European stock exchange) EXCEPT
35) Which of the following is NOT true of exchanges?
36) Which of the following is true of the York Stock Exchange?
37) A specialist is
38) In an over-the-counter market trading takes place
39) A firm with both auction market and over-the-counter capabilities was formed late in 1998 when
40) What is the most liquid market in the world?
41) The relative illiquidity of corporate bonds is reflected in their having
42) Why did seats on the major exchanges decline in value in the late 1990s?
43) Electronic communications networks (ECNs) are
44) Many analysts think Electronic communications networks (ECNs) will become important executors of exchange-traded stocks because
45) Mutual funds
46) The portfolios that mutual funds offer to savers are
47) In what year did the mutual fund industry in the United States begin?
48) Closed-end mutual funds
49) A load fund
50) Money market mutual funds
51) What percentage of the mutual fund market is held by money market mutual funds?
52) The largest category of mutual funds is
53) Under a current SEC proposal,
54) The growth in self-directed retirement accounts (such as IRAs and 401(k) plans)
55) Finance companies
56) Finance companies
57) Which of the following statements is NOT true of consumer finance companies?
58) Business finance companies
59) All of the following are types of finance companies EXCEPT
61) Sales finance companies
62) What do many analysts see finance companies as having an advantage in?
63) An insurance premium is a
64) When an insurance company makes a direct loan to a firm, the loan is known as
65) Insurance companies
66) The law of large numbers allows insurance companies to
67) Blood tests administered to applicants for medical insurance are an example of an attempt by insurance companies to deal with the problem of
68) 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
69) The use of deductibles and coinsurance are examples of attempts by insurance companies to deal with the problem of
70) Which of the following is true of mutual insurance companies?
71) Term life insurance
72) Property and casualty insurers hold
73) Property and casualty insurance companies hold more liquid assets than do life insurance companies because
74) The largest institutional participants in capital markets are
75) In which of the following have pension funds invested the most?
76) Vesting refers to
77) In a defined contribution pension plan,
78) A defined benefits plan
79) To deal with difficulties in administering pension funds, Congress in 1974 passed the
80) What is the name of the pension plan under which employees can make tax-deductible contributions through regular payroll deductions?
81) Savings institutions originated as
82) Credit unions have invested primarily in
83) The oldest U.S. government intervention in financial intermediation is government lending to
84) Which of the following is NOT a government financial institution?
85) The largest category of U.S. government lending activities is government lending to
86) Which of the following is NOT a financial intermediary?
87) “Sallie Mae” was established to encourage lending to
88) The greatest difficulty with federal loan guarantees is that
12.2 Essay Questions
1) What are venture capital funds? Why have they been successful? Is it likely that venture capital firms will become as large mutual funds, insurance companies, or pension funds?
2) Discuss changes in the level of competition in security underwriting during the last few decades.
3) Why did the share that money market mutual funds among total assets held by intermediaries nearly triple between 1980 and 2006?
4) What services are finance companies able to offer consumers and businesses that banks do not offer?
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