Eco 316 Week 2 Chapter 12 What Financial Institutions Do

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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 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?

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Economics - General Economics Week 1 Should You Invest Short Term? - Week1 DQ1 ECO316 What are the implications of a U.S. policy to “bail out” firms and heavily subsidize the economy? How could such a policy create inflation and higher interest rates? If you have cash available should you wait until interest rates rise? Treasury Inflation Protection Bonds - Week1 DQ2 ECO316 Week 2 New Product, Will I Be Rich? -Week2 DQ1 ECO316 My company just came out with a new product? Should I buy a bunch of company stock and get rich? What are the pros and cons of such an investment? Mutual Fund Regulation - Week2 DQ2 ECO316 From Chapter 12, complete problem 13 (page 276): Describe how mutual funds provide services related to risk sharing and liquidity. Distinguish a mutual fund from a bank. What do the differences you highlighted imply about the need for regulation of mutual funds as opposed to banks? Week 3 Exchange Rate Risk - Week3 DQ1 ECO316 From Chapter 16, complete problem 13 (page 382): Relate the problem of exchange rate risk in international banking to interest rate risk in domestic banking. On the basis of your understanding of interest rate risk, suggest strategies for managing exchange rate risk in international banking. Should I Expect a Bail Out? - Week3 DQ2 ECO316 From Chapter 15, complete problem 19 (page 363): Suppose that you manage a small SL that has a net worth of –$50 million. You fear that within two years, regulators will discover that your firm is insolvent and will shut you down. You have two possible investment strategies: (a) continue to operate as you have been, offering market interest rates on CDs to finance mortgage loans, or (b) offer higher than market interest rates on CDs and use the increased funds to speculate in junk bonds and real estate. Your analysis tells you that strategy (a) has a 10% chance of losing $10 million and a 90% chance of gaining $20 million, with an expected return of $17 million. Strategy (b) has an 80% chance of losing $50 million and a 20% chance of gaining $75 million, with an expected return of –$25 million. What strategy should you follow? Why? What are the consequences of your choice? What should a regulator do in this situation? How might your behavior change if you expect a government bail out? Impacts on Liquidity - Week 3 Assignment - ECO316 From Chapter 18, complete the case on pages 434-435. Your two to three page response should focus on selecting the most relevant factors and organizing them in a coherent fashion. Federal Reserve System and Politics - Week4 DQ1 ECO316 From Chapter 19, complete problem 12 (page 454): Evaluate: The Federal Reserve System is independent of the political process in the United States. Fed Impact on the Dollar - Week4 DQ2 ECO316 From Chapter 21 complete problem 14 (page 501): If the Fed wants to decrease the value of the dollar on foreign-exchange markets, what should it do? What should it do if it wants to increase the foreign-exchange value of the dollar? Week 5 Money Growth Rates and Recessions - Week 5 DQ1 ECO316 From Chapter 26, complete problem 14 (page 632): Suppose that you observed a substantial decline in the money growth rate six months before the start of every recession. Would that be enough to convince you that money affects output? Why or why not? Credit Crunch - Week 5 DQ2 ECO316 From Chapter 27, complete problem 15 (page 653): You have been assigned to determine whether the economy is experiencing a credit crunch. What patterns in movements in the federal funds rate, the volume of bank lending, and the volume of short-term lending in financial markets will you look for? Why? Week 5 - Final Paper - ECO316 Analyze the major problems that countries face in developing a balance between mortgage rates and an expansionary economy. Utilize the Chapter 27 case on pages 654-655, as well as outside resources, as a basis for developing your analysis.

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