Download 1) When those most likely to produce the outcome insured against

Chapter 12
Nonbank Finance

Multiple Choice
The federal regulatory agency responsible for regulating the activities of life insurance companies is
the FDIC.
the Fed.
the FHLBS.
none of the above; there is no such federal regulatory agency.
Question Status: Previous Edition
Which of the following is true of life insurance companies?
They hold long-term assets that are not particularly liquid.
They hold short-term liquid assets.
Payouts to policyholders are relatively predictable.
Both (a) and (c) of the above.
Question Status: Previous Edition
Life insurance companies are regulated by state governments because
they have never experienced bankruptcy.
they have never experienced profitability.
they have never experienced widespread failures.
they hold only highly liquid assets.
they are insured by the federal government.
Question Status: New
The insurance industry’s share of total financial intermediary assets fell because of
poor investment returns in the 1960s and 1970s.
widespread failures of life insurance companies.
federal regulations limiting the sale of life insurance.
unpredictability of payouts.
all of the above.
Question Status: New
418
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
An example of permanent insurance is __________ insurance, and an example of temporary insurance is
_____ insurance.
whole life; universal
whole life; variable life
whole life; term
term; whole life
term; variable life
Question Status: New
A contract requiring payment of an annual premium in exchange for the payment of a future stream of
payments beginning at a specified age and continuing until death is
whole life insurance.
an annuity.
term life insurance.
variable life insurance.
universal life insurance.
Question Status: New
The key factor causing life insurance companies to move into the management of pension funds was
the investment expertise of insurance companies.
a request for this change by managers of pension funds.
a change in state laws.
a change in federal legislation.
all of the above.
Question Status: New
Property and casualty insurance companies hold the largest share of their assets in
long-term government bonds.
short-term government securities and commercial paper.
tax-exempt municipal bonds.
medium-term corporate bonds.
Question Status: Previous Edition
Property and casualty insurance companies are organized
both as stock and mutual companies.
only as stock companies.
only as mutual companies.
primarily as cooperatives.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
419
Relative to life insurance companies, property and casualty insurance companies hold
more liquid assets.
more long-term government bonds.
more commercial mortgages.
fewer municipal bonds.
Question Status: Previous Edition
Reinsurance
allows insurance companies to reduce their risks of exposure by allocating a portion of the risk to
another company in exchange for a portion of the premium.
allows insurance companies to reduce their risks of exposure by allocating a portion of the risk to
the insured in exchange for a rebate on the premium.
allows the insured to reduce the premium by accepting a portion of the risk that would otherwise be
allocated to the insurance company.
is none of the above.
Question Status: Previous Edition
Insurance companies reduce risk exposure in exchange for a portion of their insurance premiums by
obtaining
government loan guarantees.
federal insurance.
reinsurance.
all of the above.
both (a) and (c) of the above.
Question Status: New
The specialty of Lloyd’s of London is
annuities.
hedge funds.
mutual funds.
underwriting.
reinsurance.
Question Status: Study Guide
420
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
In recent years, bank regulatory authorities have
encouraged banks to enter the insurance field.
discouraged banks to enter the insurance field.
asked Congress to write new legislation that would make it illegal for banks to enter the insurance
field.
asked Congress to write new legislation that would make it legal for banks to enter the insurance
field.
Question Status: Previous Edition
A Supreme Court ruling in March 1996 held that
state laws to prevent banks from selling insurance can be superseded by federal rulings from
banking regulators that allow banks to sell insurance.
state laws to prevent banks from selling insurance cannot be superseded by federal rulings from
banking regulators that allow banks to sell insurance.
state laws to prevent banks from selling insurance can be superseded only if Congress enacts
legislation that allow banks to sell insurance.
state laws to prevent banks from selling insurance cannot be superseded by federal legislation.
Question Status: Previous Edition
When those most likely to produce the outcome insured against are the ones who purchase insurance,
insurance companies are said to face the problem of
fraudulent claims.
moral hazard.
adverse selection.
pecuniary purchases.
Question Status: Previous Edition
Some automobile owners will drive faster knowing that they are covered by health and automobile
insurance. This behavior creates the problem of
fraudulent claims.
moral hazard.
adverse selection.
pecuniary purchases.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
421
In the case of an insurance policy, _____ occurs when the existence of insurance encourages the insured
party to take risks that increase the likelihood of an insurance payoff.
moral hazard
opportunism
adverse selection
shirking
Question Status: Previous Edition
Adverse selection occurs when those _____ likely to get _____ insurance payoffs are the ones who want
to purchase insurance the most.
least; large
least; small
most; large
most; small
Question Status: Previous Edition
In the case of an insurance policy, _____ occurs when the existence of insurance encourages the insured
party to take risks that increase the likelihood of an insurance payoff; _____ occurs when those
most likely to get large insurance payoffs are the ones who want to purchase insurance the most.
moral hazard; insurance market discrimination
moral hazard; insurance segregation
moral hazard; adverse selection
adverse selection; moral hazard
Question Status: Previous Edition
Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the
following insurance practices?
Risk-assessment screening
Risk-based premiums
Restrictive provisions
All of the above
Only (a) and (b) of the above
Question Status: Previous Edition
422
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the
following insurance practices?
Collateral deposits
Risk-based premiums
Compensating balances
All of the above
Only (a) and (b) of the above
Question Status: Previous Edition
Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the
following insurance practices?
Collection of information and screening of potential policyholders
Risk-based premiums
Restrictive provisions
All of the above
Only (a) and (b) of the above
Question Status: Previous Edition
Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the
following insurance practices?
Gender-neutral premiums
Flat-rate premiums
Restrictive provisions
All of the above
Only (a) and (b) of the above
Question Status: Previous Edition
Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the
following insurance practices?
Collection of information and screening of potential policyholders
Risk-based premiums
Cancellation of insurance
All of the above
Question Status: Previous Edition
Chapter 12
Nonbank Finance
423
Insurance companies’ attempts to minimize adverse selection and moral hazard explains which of the
following insurance practices?
Collection of information and screening of potential policyholders
Risk-based premiums
Deductibles and coinsurance
All of the above
Only (a) and (b) of the above
Question Status: Previous Edition
To prevent adverse selection, health and life insurance companies
sometimes charge higher premiums to people with certain pre-existing health conditions.
require potential policyholders to submit medical records, and may refuse to sell policies to people
with certain pre-existing health conditions.
charge the same premiums to all policyholders.
will do both (a) and (b) of the above.
Question Status: Previous Edition
To prevent adverse selection, health and life insurance companies
always charge the same premiums to people regardless of certain pre-existing health conditions.
require potential policyholders to submit medical records, and may refuse to sell policies to people
with certain pre-existing health conditions.
charge the same premiums to all policyholders.
will do both (a) and (b) of the above.
Question Status: Previous Edition
To prevent the adverse selection of AIDS patients, health and life insurance companies
refuse to grant policies to people living in New York City and Los Angeles.
require potential policyholders to submit medical records, and may refuse to sell policies to people
with AIDS.
will do both (a) and (b) of the above.
will do neither (a) nor (b) of the above.
Question Status: Previous Edition
To prevent the moral hazard problem, insurance companies may write policies
requiring that the insured experience a loss when a claim is made.
containing provisions that discourage risky behavior.
limiting the amount the companies will pay in the event that claims are submitted by policyholders.
with all of the above provisions.
with only (a) and (b) of the above provisions.
Question Status: Revised
424
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
To prevent the moral hazard problem, insurance companies may write policies
that increase benefits when the insured engages in risky behavior.
discourage the insured from engaging in risky behavior.
that increase the amount of insurance when the insured engages in risky behavior.
with only (a) and (c) of the above provisions.
Question Status: Revised
A deductible reduces __________ in exactly the same way as __________
moral hazard; risk-based premiums.
adverse selection; restrictive provisions.
moral hazard; cancellation of insurance.
adverse selection; limits on the amount of insurance.
moral hazard; coinsurance.
Question Status: New
Coinsurance reduces moral hazard in exactly the same way as
limits on insurance.
risk-based premiums.
deductibles.
restrictive provisions.
all of the above.
Question Status: New
If automobile insurance companies were to be prevented from charging risk-based premiums, but could
selectively screen potential policyholders, the likely effect would be to
increase the number of young men obtaining insurance coverage relative to young women.
decrease the number of young women obtaining insurance coverage relative to young men.
decrease the number of young men obtaining insurance coverage relative to young women.
both (a) and (b) of the above.
Question Status: Previous Edition
The fact that insurance companies charge young males higher automobile insurance premiums than young
females is an example of
risk-based premiums.
an attempt to minimize adverse selection.
coinsurance.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
425
Charging risk-based insurance premiums is a time-honored principle of insurance management to reduce
moral hazard.
adverse selection.
free riding.
principal-agent problems.
all of the above
Question Status: Previous Edition
Insurance management tools that give policyholders incentives to avoid accidents insured against include:
deductibles.
risk-based premiums
coinsurance.
all of the above.
Question Status: Previous Edition
Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide is an
example of a
restrictive provision.
restrictive covenant.
anti-fraud exclusion.
risk-based deductible.
Question Status: Previous Edition
When a life-long chain smoker attempts to purchase a life insurance policy,
the life insurance company faces the problem of adverse selection.
the smoker can expect to pay a much higher premium than a nonsmoker.
the smoker is said to commit fraud.
only (a) and (b) of the above.
Question Status: Previous Edition
When a life-long chain smoker attempts to purchase a life insurance policy,
the life insurance company faces the problem of adverse selection.
the smoker can expect to pay a much higher premium than a nonsmoker.
there may be a limit on the amount of insurance provided.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
426
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Life insurance companies face the problem of adverse selection when
persons who have contracted AIDS attempt to purchase life insurance.
life-long chain smokers attempt to purchase life insurance.
school teachers attempt to purchase life insurance.
all of the above attempt to purchase life insurance.
only (a) and (b) of the above attempt to purchase life insurance.
Question Status: Previous Edition
Because young males have a much higher rate of accidents on average than young females, automobile
insurers will be likely to
charge young males higher insurance premiums than young females, all else equal.
encourage young males to purchase collision insurance policies with relatively high deductibles.
encourage young females to purchase collision insurance policies with no deductibles.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
Because insurance companies cannot always screen good from bad risks, and because policyholders may
behave in a manner that increases the likelihood of insurance payouts, they
base premiums on the risk classification of the policyholder.
hire investigators to uncover fraudulent claims.
sometimes require that policyholders share part of the loss by paying deductibles and coinsurance.
do all of the above.
do only (a) and (b) of the above.
Question Status: Previous Edition
Because insurance companies cannot always screen good risks from bad, and because policyholders may
behave in a manner that increases the likelihood of insurance payouts, insurance companies
charge flat-rate premiums based on worse-case scenarios.
hire investigators to uncover fraudulent claims.
require that policyholders purchase all their insurance from just one company.
do all of the above.
do only (a) and (b) of the above.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
427
The higher the insurance coverage, the _____ the policyholder can gain from risky activities that make an
insurance payoff _____ likely.
more; less
more; more
less; less
less; more
Question Status: Previous Edition
Between 1960 and 2002, pension funds’ share of total financial intermediary assets increased from _____
percent to _____ percent.
5; 35
10; 35
10; 30
5; 30
Question Status: Revised
Vesting refers to
the length of time an insurance company has been in business.
the length of time that a person must be enrolled in a pension plan before being entitled to receive
benefits.
the length of time until a CD matures.
the premium required under term insurance.
Question Status: Previous Edition
A defined-benefit pension
determines benefits by contributions and their earnings.
fixes benefits in advance.
links benefits to investment performance.
all of the above.
both (b) and (c) of the above.
Question Status: New
A defined-defined contribution pension plan
determines benefits by contributions and their earnings.
fixes benefits in advance.
may be underfunded.
all of the above.
both (a) and (c) of the above.
Question Status: New
428
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
If a pension fund has sufficient contributions and earnings to pay benefits, it is said to be
underfunded.
vested.
fully funded.
both (a) and (b) of the above.
both (b) and (c) of the above.
Question Status: New
If a pension fund has insufficient contributions and earnings to pay benefits, it is said it be
underfunded.
vested.
fully funded.
both (a) and (b) of the above.
both (b) and (c) of the above.
Question Status: New
Fraudulent practices and other abuses of private pension funds led Congress to enact the
FDIC Act.
Federal Reserve Act.
FHLBS.
Employee Retirement Income Security Act.
Question Status: Previous Edition
The Employee Retirement Income Security Act (ERISA) was enacted because of
mismanagement.
fraudulent practices.
underfunding.
all of the above.
both (a) and (c) of the above.
Question Status: New
The Employee Retirement Income Security Act (ERISA) established standards for pension plans,
including
rules for vesting.
rules for the degree of underfunding.
restrictions on investment practices.
all of the above.
both (a) and (b) of the above.
Question Status: New
Chapter 12
The government corporation that insures pension benefits is
Fannie Mae.
Ginnie Mae.
Freddie Mac.
Sallie Mae.
Penny Benny.
Question Status: New
The Pension Benefit Guarantee Corporation performs a role similar to that of
the Federal Reserve System.
the Comptroller of the Currency.
the FDIC.
the Office of Thrift Supervision.
Question Status: Previous Edition
Keough plans and IRAs are
individual pension plans.
government pension plans.
corporate pension plans.
public pension plans.
Question Status: Previous Edition
Social Security is a
fully funded pension plan.
federally insured private pension plan.
government sponsored private pension plan.
“pay-as-you-go” system.
Question Status: Previous Edition
The Social Security system is an example of a public pension plan that is
underfunded.
fully funded.
overfunded.
none of the above.
Question Status: Previous Edition
Nonbank Finance
429
430
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Since social security benefits are paid from current contributions, the system is a
fully funded system.
overfunded system.
“pay-as-you-go” system.
defined contribution system.
privatized system.
Question Status: New
Privatization of social security involves
tax reductions.
benefit reductions.
increasing the retirement age.
investing portions of the trust fund in corporate securities.
abolishing the system.
Question Status: New
Plans for privatization of social security involve
government investment of the trust fund in corporate securities.
shift of trust fund assets to individual accounts that can be invested in private assets.
shifting management of the trust fund to private investment managers.
all of the above.
both (a) and (b) of the above.
Question Status: New
Allowing individuals to manage a portion of their social security funds is
socialization.
privatization.
democratization.
regeneration.
disintermediation.
Question Status: New
Privatization of the Social Security system is being considered due to
the desire to reduce taxes.
demands to reduce the retirement age.
reduced life expectancy.
underfunding of the system.
the fact that returns to corporate securities are always positive.
Question Status: New
Chapter 12
Compared to commercial banks and thrift institutions, finance companies are
heavily regulated.
able to attract small depositors.
prevented from making relatively small loans.
virtually unregulated.
Question Status: Previous Edition
When compared to banks, finance companies
are virtually unregulated.
are heavily regulated.
borrow in large amounts and lend in small amounts.
both (a) and (c) of the above.
both (b) and (c) of the above.
Question Status: Revised
Which of the following is not provided by business finance companies?
Factoring
Leasing equipment
Checking accounts
All are provided by business finance companies.
Question Status: Previous Edition
Which of the following is provided by business finance companies?
Factoring
Equipment that can be leased
Checking accounts
Each of the above
Only (a) and (b) of the above
Question Status: Previous Edition
The practice of factoring involves
the syndication of underwriting large security issues.
the selling of accounts receivable at a discount in return for cash.
breaking up large mutual funds into smaller funds.
spreading the risk of insurance through reinsurance.
government guarantees of loans.
Question Status: Study Guide
Nonbank Finance
431
432
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Loans made to consumers by finance companies are typically
only for the purchase of cars or boats.
at interest rates below those charged by banks for the same type of loan.
at interest rates above those charged by banks for the same type of loan.
not made for less than $10,000.
Question Status: Previous Edition
The General Motors Acceptance Company (GMAC) is a
sales finance company.
consumer finance company.
business finance company.
public finance company.
government finance company.
Question Status: Study Guide
A person remodeling her house could obtain a loan from a
sales finance company.
consumer finance company.
business finance company.
public finance company.
government finance company.
Question Status: Study Guide
Before 1970, mutual funds invested almost solely in
corporate bonds.
corporate common stocks.
United States government bonds.
municipal bonds and money market securities.
Question Status: Revised
Mutual funds are primarily held by
financial institutions.
households.
nonfinacial businesses.
the Social Security trust fund.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
433
In 1980, only about _____ percent of households held mutual fund shares, while this number has risen to
nearly _____ percent in recent years.
3; 25
4; 35
6; 50
8; 60
Question Status: Revised
Mutual funds that allow shares to be redeemed at any time at a price that is tied to the asset value of the
fund are known as
close-end funds.
open-end funds.
asset-value funds.
redeemable funds.
Question Status: Previous Edition
Mutual funds in which a fixed number of nonredeemable shares are sold at an initial offering and are then
traded in the over-the-counter market, like shares of common stock, are called
open-end funds.
close-end funds.
OTC funds.
primary-issue funds.
Question Status: Previous Edition
Most mutual funds are
no-load funds.
load funds.
large-load funds.
small-load funds.
Question Status: Previous Edition
A sales commission is charged for the purchase of
no-load mutual funds.
load mutual funds.
sinking mutual funds.
syndicated funds.
brokered funds.
Question Status: Study Guide
434
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Which of the following was the fastest-growing financial intermediary of the 1970s?
Commercial banks
Credit unions
Finance companies
Money market mutual funds
Question Status: Previous Edition
In 1977, the assets in money market mutual funds was less than $4 billion; by 1980, assets had climbed to
$50 billion and now stand at $1,500 billion, or about _____ of the asset value of all mutual funds.
one-tenth
one-fourth
one-third
one-half
Question Status: Revised
Because the assets they offer individuals are virtually identical, banks face serious competition from
load mutual funds.
stock mutual funds.
closed-end mutual funds.
bond mutual funds.
money market mutual funds.
Question Status: New
Several features distinguish hedge funds from traditional mutual funds including:
Hedge funds have a minimum investment requirement between $100,000 and $20 million.
Hedge funds are limited to no more than ninety-nine investors (limited partners).
Hedge fund investors must have steady annual incomes of $200,000 or more or a net worth of $1
million, excluding their homes.
All of the above.
Only (a) and (b) of the above.
Question Status: Revised
Several features distinguish hedge funds from traditional mutual funds including:
Mutual funds have a minimum investment requirement of $1,000 or more; hedge funds have no
minimum investment requirement.
Hedge funds typically charge investors large fees relative to mutual funds.
Hedge fund investors need not commit their money for than a few weeks at a time, explaining why
they pay higher fees.
All of the above.
Only (a) and (b) of the above.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
435
Several features distinguish hedge funds from traditional mutual funds including:
Hedge funds have a minimum investment requirement of $100,000 or more.
Hedge funds typically charge investors large fees relative to mutual funds.
Hedge fund investors need not commit their money for than a few weeks at a time, explaining why
they pay higher fees.
All of the above.
Only (a) and (b) of the above.
Question Status: Previous Edition
Several features distinguish hedge funds from traditional mutual funds including:
Hedge funds have a minimum investment requirement of $100,000 or more.
Hedge funds typically charge investors smaller fees relative to mutual funds.
Hedge fund investors must commit their money for long periods time (often several years), which
explains why they pay lower fees.
All of the above.
Only (a) and (b) of the above.
Question Status: Previous Edition
The experience of Long-Term Capital demonstrates that
hedge funds are far from risk-free, despite their use of market-neutral strategies.
Nobel prize winners can fail to predict the changes in the spread between prices on government and
corporate bonds.
the failure of the largest hedge fund had no discernable effect on U.S. financial markets.
All of the above.
Only (a) and (b) of the above.
Question Status: Previous Edition
Long-Term Capital got into trouble when it thought that the spread between prices on long-term Treasury
bonds and long-term corporate bonds was too ____, and bet that this “anomaly” would disappear
and the spread would _____.
high; narrow
low; widen
low; narrow
high; widen
Question Status: Revised
436
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
Of the following financial intermediaries, which holds the least liquid assets?
Property and casualty insurance companies
Life insurance companies
Money market mutual funds
Commercial banks
Question Status: Previous Edition
Financial intermediaries include
commercial banks.
insurance companies.
pension funds.
mutual funds.
all of the above.
Question Status: Study Guide
In order to promote residential housing, the government has created the following agencies to provide
funds to the mortgage market by selling bonds and using the proceeds to buy mortgages:
the Federal National Mortgage Association.
the Government National Mortgage Association.
the Federal Home Loan Mortgage Company.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
In order to promote residential housing, the government has created the following agencies to provide
funds to the mortgage market by selling bonds and using the proceeds to buy mortgages:
Fannie Mae.
Ginnie Mae.
Freddie Mac.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
In order to promote residential housing, the government has created the following agencies to provide
funds to the mortgage market by selling bonds and using the proceeds to buy mortgages:
Fannie Mae.
Ginnie Mae.
Sallie Mae.
all of the above.
only (a) and (b) of the above.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
437
Of the three agencies that have been created to promote residential housing, the only one that is an entity
of the U.S. government is
the Federal National Mortgage Association.
the Government National Mortgage Association.
the Federal Home Loan Mortgage Company.
none of the above.
Question Status: Previous Edition
Of the three agencies that have been created to promote residential housing, the only one that is an entity
of the U.S. government is
Fannie Mae.
Ginnie Mae.
Freddie Mac.
Sallie Mae.
Question Status: Previous Edition
Concerns about Fannie Mae and Freddie Mac are based on
the large volume of debt that they hold.
their low capital-to-asset ratios.
the fact that they are government agencies.
all of the above.
both (a) and (b) of the above.
Question Status: New
Failure of Fannie Mae and Freddie Mac would be a shock to the financial system because
of the amount of debt they hold.
they have low capital-to-asset ratios.
they are federally-sponsored agencies.
all of the above.
both (a) and (c) of the above.
Question Status: New
Should Fannie Mae or Freddie Mac fail, the costs would be born by
their shareholders.
their customers.
the taxpayers.
all of the above.
both (a) and (c) of the above.
Question Status: New
438
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
When a corporation wishes to sell its securities, it usually employs
a takeover specialist.
a finance company.
an investment bank.
a commercial bank.
none of the above.
Question Status: Previous Edition
In financial markets an IPO is an
investment portfolio option.
initial public offering.
initial portfolio offering.
investment portfolio offering.
Question Status: Revised
In financial markets, when a firm issuing new securities has previously issued securities, these securities
are called
seasoned issues.
an initial public offering.
secondary issues.
investment-grade issues.
private offerings.
Question Status: New
In financial markets, when a firm issues stock for the first time it is called an
investment portfolio option.
initial public offering.
initial portfolio offering.
investment portfolio offering.
Question Status: Revised
IPOs have become very important in the U.S. economy because they are a major source of financing for
so-called “blue-chip” companies.
hedge funds.
internet companies.
mutual funds.
Question Status: Previous Edition
Chapter 12
Nonbank Finance
439
Investment banks purchase new security issues in the hope of making a profit. This is the act of
pawning.
factoring.
syndicating.
underwriting.
reinsuring.
Question Status: Study Guide
______ assume the risk of issuing a new stock in the hope of earning profits on its sale.
Stock brokers
Securities dealers
Underwriters
Stock speculators
Reinsurers
Question Status: Study Guide
Dealers, in contrast to brokers,
make their living on the spread between the bid price and asked price.
hold inventories of securities.
are subject to the risk of falling securities prices.
do all of the above.
do only (b) and (c) of the above.
Question Status: Previous Edition
Brokers, in contrast to security dealers,
hold inventories of securities.
make their income through commissions.
make their living on the spread between the bid price and the asked price.
do all of the above.
Question Status: Previous Edition
_____ assist in the initial sale of securities in the primary market; _____ assist in the trading of securities
in the secondary markets.
commercial banks; hedge funds
commercial banks; mutual funds
investment banks; securities brokers and dealers
commercial banks; securities brokers and dealers
investment banks; mutual funds
Question Status: Previous Edition
440
Frederic S. Mishkin • Economics of Money, Banking, and Financial Markets, Seventh Edition
The federal agency that ensures that potential security purchasers are well informed is the
FCC.
FTC.
NRC.
SEC.
RFC.
Question Status: Study Guide
An innovation that blurred the distinction between brokerage firms and commercial banks was Merrill
Lynch’s development in 1977 of the
cash management account.
money market mutual fund.
individual retirement account.
discount brokerage.
Question Status: Previous Edition
A specialist performs the functions of a
broker.
dealer.
underwriter.
all of the above.
both (a) and (b) of the above.
Question Status: New
A specialist
matches buy and sell orders.
buys or sells from personal inventory when orders do not match.
maintains orderly trading of securities.
all of the above.
both (a) and (b) of the above.
Question Status: New
Elimination of minimum brokerage commission rates occurred because of
competition from banks.
demands of institution investors.
competition from foreign brokerage firms.
changes in state laws.
an action of the securities and Exchange Commission.
Question Status: New
Chapter 12
Nonbank Finance
441
Internationalization of capital markets has resulted in
foreign companies being listed on the U.S. stock exchanges.
24-hour trading of stocks.
federal regulations prohibiting security transactions on the Internet.
both (a) and (c) of the above.
both (a) and (b) of the above.
Question Status: New
The financial supermarket concept would provide consumers the convenience of using one
firm to
buy real estate.
obtain a student loan.
buy socks.
all of the above.
both (a) and (b) of the above.
Question Status: New

Essay Questions
Explain the problems that necessitate insurance management, and three methods insurance companies use
to address these problems. Identify the problem that each practice addresses.
Explain why the Social Security system faces problems. Discuss the possible solutions to these problems.
Explain the factors that account for the large increase in market share experienced by mutual funds since
1980.