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

25) Deleveraging

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

60) Factoring

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?