Full Test Bank Ch13 Financial Industry Structure

Student name:__________

1) Why does the United States have more banks than most other highly industrialized countries?

2) Why did it take almost 100 years before the United States had its own national currency?

3) What does it mean to say the United States has a dual banking system?

4) What is the source of regulatory competition in banking? Discuss how the focus of this competition has changed over time.

5) It has been argued that the laws that prohibited branch banking were needed to protect consumers from large monopoly banks. Does that argument hold up to close scrutiny? Explain.

6) Explain why anti-branching laws often created credit crunches that slowed economic growth.

7) It has been argued that regulations can often be the source of innovation. Provide an example of this in the banking industry.

8) The number of banks in the United States has fallen almost by half in the past twenty years or so. Was this the result of bank failures or were some due to another cause? Explain.

9) The Riegle-Neal Interstate Banking and Branching Efficiency Act has allowed banks to diversify themselves geographically. Has this geographical expansion resulted in the harm to consumers that early supporters of anti-branching laws feared? Explain.

10) Explain why a domestic bank in the United States might create a subsidiary bank in a foreign location like the Cayman Islands.

11) Why is it important to have a financial benchmark for short-term interest rates?

12) Explain why authorities have committed to using the London Interbank Offered Rate (LIBOR) as a financial benchmark for short-term interest rates only through 2021.

13) Owners and managers have cited three reasons for the creation of large financial firms or universal banks. What are these reasons?

14) The growth of internet banking seems to be on the rise. Discuss what the continued growth of internet banking should do to both the economies of scale and economies of scope of banking.

15) There are two current trends in the financial industry which run in opposite directions—generalists and specialists. Describe each of these. What might this mean for the future of the industry?

16) What are the basic differences between term and whole life insurance?

17) Which insurance companies, life or property and casualty, would you think would invest more in long-term assets? Explain.

18) Many insurance companies sell group policies that cover all of the employees at a particular firm, or all of the members of a particular organization. How could this policy help to overcome the problem of adverse selection?

19) Within the insurance industry a common saying is that insurance works because of the "law of large numbers." What do you think is meant by this?

20) A very controversial issue in many states currently is whether or not insurance companies should be allowed to use a person's credit history as a tool in determining the individual's automobile and homeowner insurance premiums. Without getting into the legal or ethical issues, what do you think the insurance companies' motives might be for wanting to use the credit report?

21) Why do you think most health insurance policies require the first $100 or so of every claim and a percentage of the bill after that to be paid by the insured?

22) Why do insurance companies often find it necessary to purchase reinsurance?

23) Explain why the decoding of the human genome has interesting implications for the life insurance industry.

24) Explain the difference between a pension fund that is a defined-contribution plan and one that is a defined-benefit plan.

25) In what way(s) can a pension plan be seen as the opposite of life insurance?

26) Why do you think Congress and the President are reluctant to fix the problems (identified in the text) with the Social Security System?

27) From a transaction cost perspective, discuss why a firm may contract with an investment bank to underwrite or place an issue.

28) Explain why a large equipment provider that sells to many of its commercial customers on account may use a finance company.

29) Evaluate the pros and cons of the repeal of the Glass-Steagall Act of 1933.

30) Considering the government-sponsored enterprises like Freddie Mac, Fannie Mae, and others, do you see any indication that the managers of these agencies are creating a moral hazard? Explain.

31) When compared to Canada or Japan, the United States is unusual in that it has

A) far fewer banks than either of those countries.
B) fewer banks than Japan but more than Canada.
C) more banks than Japan but fewer than Canada.
D) more banks than either Japan or Canada.

32) In recent years the U.S. banking structure has changed in such a way that there are now

A) more banks.
B) fewer branches.
C) fewer banks but more branches.
D) fewer banks and fewer banks with branches.

33) Why has the number of banks in the United States fallen steadily in the past three decades?

A) Modern consumers prefer “brick and mortar” banks.
B) Consumers do not use financial services as much as they used to.
C) Firms obtain financing without the use of financial intermediation now.
D) There has been a trend toward consolidation in the banking industry.

34) The financial crisis in the United States in 2007–2009 brought about all of the following changes except which one?

A) a rise in the number of unit banks
B) an increase in the deposit share of the top four U.S. commercial banks
C) the placement of the two government-sponsored enterprises for housing finance into conservatorship
D) a run on money-market mutual funds

35) If someone wants to start a bank today they would have to

A) obtain a charter from the federal government.
B) simply have $5 million is startup capital, a charter is no longer needed.
C) obtain a charter either from the federal or state government.
D) obtain only a state charter since the federal government stopped issuing charters in 1970.

36) Unit banks are

A) banks with no branches.
B) more numerous in the United States than they were in previous decades.
C) no longer permitted to exist in the United States.
D) commercial banks that have combined into one unit with an investment bank.

37) A unit bank is a bank that

A) only makes one type of loan (e.g., home mortgages).
B) only offers savings accounts.
C) provides a myriad of financial services, so customers get all or most of their financial needs taken care of at the bank.
D) has no branches.

38) The National Banking Act of 1863 initiated

A) an abrupt shift in power toward the states.
B) a gradual shift in power toward the states.
C) an abrupt shift in power away from the states.
D) a gradual shift in power away from the states.

39) Prior to the Civil War most state banks issued their own banknotes. Which one of the following is not true about these banknotes?

A) Their values decreased as the holder moved farther from the bank.
B) They were worthless if the bank failed.
C) They were not efficient as a means of payment if the holder was far from the bank.
D) They were usually redeemable in gold.

40) The dual banking system in the United States today refers to

A) a bank's ability to issue checking and saving accounts.
B) a bank's ability to own another financial institution.
C) the ability of banks to be either federally or state chartered.
D) a deposit institution's decision to be either a bank or a savings and loan.

41) In the United States today

A) most banks are federally chartered.
B) most banks are state chartered.
C) there are approximately equal numbers of state and federally chartered banks.
D) all new banks are federally chartered.

42) Most banks in the United States today are

A) state chartered so they can use state-issued banknotes.
B) federally chartered because this is a more permissive environment.
C) state chartered because this increases flexibility, and, thus, profitability.
D) federally chartered because it locks the bank into a more secure environment.

43) Banks exert some control over who will regulate them because banks

A) spend a lot of money contributing to political campaigns.
B) can switch their charter from state to federal and vice versa.
C) have the right to choose which regulator will oversee their bank.
D) pay the salary of the regulator.

44) In the early years of the Great Depression, 1929–1933,

A) over one half of all U.S. banks failed.
B) two-thirds of U.S. banks failed.
C) more than a third of all U.S. banks failed.
D) a little less than one-quarter of U.S. banks failed.

45) The bank failures that occurred during the early years of the Great Depression

A) hurt large depositors the most since it was the large money center banks that failed.
B) hurt small depositors the most since it was mainly small banks that failed.
C) hurt the taxpayers the most since the FDIC covered most of the losses of depositors.
D) totaled about 30 percent of total bank customer deposits.

46) The Federal Deposit Insurance Corporation (FDIC) was created

A) in 1933 as a part of the Glass-Steagall Act.
B) when the Federal Reserve was created in 1914.
C) prior to the stock market crash of 1929.
D) in 1927 as a part of the McFadden Act.

47) The Glass-Steagall Act of 1933

A) required commercial banks to sell off their investment banking operations.
B) eliminated the FDIC.
C) required federally chartered banks to meet the branching restrictions of the states.
D) required all state banks to get federal charters.

48) The United States has many banks because

A) small banks are more profitable than large banks.
B) historically, many states outlawed bank branching.
C) the Great Depression caused the failure of the large banks, leaving many small banks.
D) the Glass-Steagall Act forced the splitting up of large banks.

49) Which one of the following statements most accurately describes the state of banking in the United States?

A) a large number of large banks and a small number of small banks
B) a large number of large and small banks
C) a small number of large and small banks
D) a large number of small banks and a small number of large banks

50) As of 2019, the number of commercial banks in the United States is approximately

A) 200.
B) 4,700.
C) 14,000.
D) 80,000.

51) Many states prohibited bank branching for all of the following reasons except

A) they feared the concentration and monopoly power of large banks.
B) they generated significant revenue from issuing bank charters.
C) they wanted to protect the profits of banks since they generated tax revenue from these profits.
D) the McFadden Act of 1927.

52) The actual results of the McFadden Act included

A) increased efficiency of banking across the country.
B) a tight network of interconnected banks across the country.
C) the continued operation of small, inefficient banks.
D) the elimination of banking monopolies.

53) The McFadden Act produced a fragmented banking system where competition was prohibited. The result, in economic terms, was

A) less efficiency due to lack of pressure to innovate.
B) spillover benefits to banks outside of the geographic region.
C) modern banks with no restrictions on adopting new technologies.
D) a decrease in wellbeing for everyone, including bank owners.

54) One of the results of the limit on bank branching was

A) increased diversification in the loan portfolio of small banks.
B) curtailment of credit availability for borrowers in small towns.
C) lower profits for banks.
D) increased efficiency in the operations of banks.

55) Bank holding companies developed

A) to get around the limitations on bank branching.
B) so foreign banks could open branches in the United States.
C) to circumvent regulation by the Office of the Comptroller of the Currency.
D) so that unit banks could combine into larger banks.

56) Over the last four decades in the United States, the number of banks has

A) been increasing slowly.
B) stayed about the same.
C) been decreasing.
D) more than doubled.

57) One way that a bank could offer nonbank services across more than one state was to

A) file for a foreign bank charter.
B) be a federally chartered bank rather than a state chartered bank.
C) create a bank holding company.
D) become a central bank.

58) The Bank Holding Company Act of 1956

A) significantly broadened the scope of what bank holding companies could do.
B) limited bank holding companies to operating only within their chartered state.
C) limited the scope of bank holding companies in terms of services offered.
D) repealed the McFadden Act of 1927.

59) As a result of technology, many small businesses today

A) are located geographically closer to their bank.
B) are located geographically farther from their bank.
C) have more face-to-face interactions with their banker.
D) no longer need banks.

60) Technology has provided ways for customers to bank from a distance, which has lessened which type of market failure in the industry?

A) free riding of customers
B) monopoly power of local banks
C) government regulation
D) spillover costs from municipalities

61) One of the results of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was

A) a reversal of the branching restrictions of the McFadden Act.
B) an increase in the number of banks in the United States.
C) a decrease in the average size of banks.
D) a decrease in commercial banks but an increase in the number of savings and loans and savings banks.

62) The sharp reduction in the number of banks that has occurred since the mid-1980s has been due primarily to

A) bank failures from increased competition.
B) bank mergers.
C) the closing of banks by federal regulators.
D) the revoking of state bank charters.

63) The Riegle-Neal Interstate Banking and Branching Efficiency Act permits banks to acquire an unlimited number of branches nationwide. This increased competition has led to

A) less efficiency in the banking system.
B) lower unemployment in local economies.
C) higher fees to cover higher costs of management.
D) higher profits for banks through lower operating costs and decreased loan losses.

64) One result of the Riegle-Neal Interstate Banking and Branching Efficiency Act was that

A) banking system efficiency decreased.
B) banks became less geographically diversified.
C) banking system efficiency increased.
D) banks became less geographically diversified and banking system efficiency decreased.

65) The Gramm-Leach-Bliley Act

A) repealed the Riegle-Neal Interstate Banking and Branching Efficiency Act.
B) repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms.
C) repealed the McFadden Act's restriction on bank branching.
D) reinforced the Glass-Steagall Act's limitation on commercial banks' availability to merge with insurance or securities firms by increasing the penalties for doing so.

66) The Economic Growth, Regulatory Relief, and Consumer Protection Act

A) required increases in federal deposit insurance on deposits.
B) increased penalties for banks who take on too much risk.
C) increased regulation on banks by requiring more government oversight.
D) relaxed regulatory requirements on small and medium-sized banks and even some larger banks.

67) An Edge Act corporation is

A) a company created so a U.S. bank can operate in more than one state.
B) a subsidiary of a bank created to provide insurance and securities services.
C) a company created by a nonbank corporation used to purchase and operate banks.
D) a subsidiary of a domestic bank that is established specifically to engage in international banking transactions.

68) The growth of international banking has

A) decreased the competition that domestic banks face.
B) decreased the efficiency of most banks.
C) enhanced economic growth in many countries.
D) increased the monopoly power of most banks.

69) Eurodollars are

A) the currency of the European Economic Union.
B) euro-denominated deposits in U.S. banks.
C) dollar-denominated deposits in banks outside the United States.
D) dollars that are specially printed for use abroad to minimize counterfeiting.

70) Eurodollar deposits often earn higher returns than U.S. bank deposits for all of the following reasons except

A) Eurodollar deposits are not subject to U.S. reserve requirements.
B) the bank does not have to pay deposit insurance premiums on these deposits.
C) regulatory compliance may be more costly for a foreign bank than a U.S. bank.
D) taxes on the profits on banks outside the United States may be lower on banks inside the United States.

71) As of 2019, but perhaps not beyond 2021, the world’s leading benchmark for short-term interest rates is the

A) international federal funds rate.
B) London Interbank Offered Rate.
C) discount rate.
D) International Prime Rate.

72) Why is LIBOR “on life support” as a financial benchmark in 2019?

A) It is immune to market transaction manipulations.
B) It involves judgment and is not based on transactions.
C) It is as close to default-risk-free as we are likely to get.
D) It is based on a deep, liquid market making it easy to manipulate.

73) The interest rate at which banks lend each other Eurodollars is known as the

A) international federal funds rate.
B) London Interbank Offered Rate.
C) discount rate.
D) International Prime Rate.

74) The gap between LIBOR and the expected Federal Reserve policy interest rate provides a key measure of the

A) direction of movement of the Euro relative to the U.S. dollar on the foreign exchange market.
B) persistence and intensity of the liquidity crisis.
C) expected length of a coming global recession.
D) movement of the U.S. stock market.

75) Citigroup is an example of

A) an Edge Act corporation.
B) a foreign bank.
C) a financial holding company.
D) a unit bank.

76) Universal banks are

A) firms that engage in banking services across many countries.
B) firms that engage a wide array of financial and nonfinancial activities.
C) banks that make direct investment in nonfinancial firms.
D) multinational corporations that own U.S. banks.

77) Which one of the following is an accurate statement about universal banks?

A) In Germany universal banks do everything under one roof, including direct investment in the shares of nonfinancial firms.
B) In Germany the provision of insurance, banking, and securities must be done by separate corporations.
C) As in Germany, universal banks in the United States do everything under one roof, including direct investment in the shares of nonfinancial firms.
D) Universal banks in the United States account for the largest share of financial intermediary assets.

78) Which one of the following is not a reason to create large financial holding companies? Financial holding companies

A) offer a wide array of services under one brand name.
B) need only one CEO, one Board of Directors, and one accounting system regardless of size.
C) are well diversified so risk is reduced.
D) are exempt from having to pay for FDIC insurance on deposits.

79) Which one of the following supports the economies of scale argument for increased profits for large financial holding companies?

A) Financial holding companies offer a wide array of services under one name.
B) Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size.
C) Financial holding companies are well diversified so risk is reduced.
D) The profitability of financial holding companies does not rely on one particular line of business.

80) Which one of the following supports the economies of scope argument for increased profits for large financial holding companies?

A) Financial holding companies offer a wide array of services under one name.
B) Financial holding companies need only one CEO, one Board of Directors, and one accounting system regardless of size.
C) Financial holding companies face declining average costs per dollar of deposits.
D) The profitability of financial holding companies relies on one particular line of business.

81) Which one of the following is not a nondepository institution?

A) a savings and loan
B) an insurance company
C) a mutual fund company
D) a pension fund

82) Over the past 50 years, the percentage(s) of assets for all financial intermediaries controlled by U.S. banks has

A) increased while the percentage for mutual funds has decreased.
B) decreased as has the percentage for mutual funds while insurance companies have increased their percentage.
C) increased while the percentage controlled by insurance companies and mutual funds has decreased.
D) decreased while the percentage for stock and bond funds has increased.

83) Over the past 50 years, the percentage(s) of assets for all financial intermediaries controlled by government-sponsored enterprises has

A) decreased as has the percentage for mutual funds while insurance companies have increased their percentage.
B) decreased and the percentage controlled by stock and bond funds has increased.
C) increased while the percentage controlled by U.S. banks has decreased.
D) increased as have those controlled by banks, insurance companies, mutual funds, and pensions.

84) Modern forms of insurance can be traced back to around what year?

A) 1400
B) 1700
C) 1800
D) 1900

85) Lloyd's of London is famous for

A) being the largest insurance company in the world.
B) going out of business when it insured too many odd risks.
C) offering insurance against unusual risks.
D) being the oldest insurance company in the world.

86) Lloyd's of London is the best-known insurance company in the world today because they insure

A) low-risk stable enterprises.
B) unique and sometimes very odd situations.
C) physical structures to minimize the risks to their underwriters.
D) marine-related risks.

87) Insurance companies perform all of the following functions of financial intermediaries except

A) transferring risk.
B) pooling the resources of small savers.
C) making large investments.
D) supplying liquidity.

88) Insurance companies offer which two basic types of insurance?

A) life insurance and property and casualty insurance
B) life insurance and mutual funds
C) property and casualty companies
D) whole life and term life insurance companies

89) Whole life insurance

A) has a rising premium as the policyholder ages, but term life insurance has a fixed premium.
B) is pure insurance while term life insurance has a savings component.
C) is usually less expensive than term life insurance.
D) is a combination of term life insurance and a savings account.

90) Whole life insurance has decreased in popularity due to

A) many whole life insurance companies becoming bankrupt.
B) cheaper savings alternatives that have developed, making whole life policies expensive savings vehicles.
C) mergers with property and casualty companies, raising the cost of all insurance.
D) lower interest rates on alternative savings vehicles.

91) A typical automobile insurance policy is an example of

A) liability insurance only.
B) property and casualty insurance.
C) property insurance only.
D) casualty insurance only.

92) Property and casualty insurers will hold assets of shorter maturities than life insurance companies because

A) shorter maturity assets usually have higher returns.
B) life insurance companies may find they need to get liquid unexpectedly.
C) property and casualty insurers can find themselves needing to get liquid unexpectedly.
D) life insurance companies generally take on more risk than property and casualty companies.

93) Insurance company assets will include

A) stocks and bonds.
B) only bonds.
C) only stocks.
D) only U.S. Treasury securities.

94) A young father needing to provide his family with financial security would be better off purchasing

A) a whole life insurance policy.
B) a term life insurance policy.
C) as much life insurance as they can afford.
D) no life insurance; instead he should focus on saving.

95) Insurance companies can predict fairly accurately

A) the percentage of policyholders who will have a claim and which policyholders will have a claim.
B) which policyholders will suffer a loss but not the percentage of policyholders that will do so.
C) the type of losses policyholders will incur but not the percentage of policyholders that will file claims.
D) the percentage of policyholders that will file claims but not the policyholders that will file them.

96) In order for insurance companies to generate predictable payouts, they need to

A) spread the risk across many policies.
B) accept policyholders from a very specific geographic area.
C) focus on insuring only specific events, for example only fire.
D) offer only life insurance.

97) Because most insurance companies insure many people, they do not have to worry about the problem of

A) moral hazard.
B) adverse selection.
C) spreading of risk.
D) information asymmetry.

98) A person who discovers that he has advanced stages of cancer and calls his life insurance agent to double his insurance policy is an example of

A) a moral hazard risk.
B) the risk of adverse selection.
C) the problem of information symmetry.
D) risk spreading.

99) A homeowner discovers that a large tree in his yard is diseased and may fall in a bad windstorm which would likely destroy the garage. The cost to have the tree cut down is significant, but the homeowner has an insurance policy and the deductible is less than the cost to have the tree removed. He figures that if the tree falls and destroys the garage, the insurance company will pay. This is an example of

A) information symmetry.
B) adverse selection.
C) moral hazard.
D) screening.

100) One way insurance companies deal with the problem of adverse selection is by

A) charging the same price to everyone.
B) screening applicants.
C) monitoring policyholders after they have purchased insurance.
D) spreading the risk in the same geographic area.

101) In many cases, life insurance companies will require applicants to complete a physical exam. This is done to avoid the problem of

A) adverse selection.
B) moral hazard.
C) free riding.
D) transaction costs.

102) Many health insurers require a deductible where the policyholder pays the first part of any loss. The use of a deductible most directly addresses the problem of

A) free riding.
B) adverse selection.
C) people going uninsured.
D) moral hazard.

103) An insurance company provides liability insurance to a restaurant protecting the owner against claims from customers. One area of coverage is protection against food poisoning claims. The insurance company may periodically send an employee into the restaurant to observe food preparation and food storage processes. The insurance company is trying to avoid

A) free riding.
B) moral hazard.
C) adverse selection.
D) transaction costs.

104) The use of coinsurance clauses and deductibles is an attempt by insurance companies to deal with the problem of

A) nonpayment of premiums.
B) adverse selection.
C) insufficient government regulation.
D) moral hazard.

105) Reinsurance is used by insurance companies faced with

A) the prospects of a large but diversified risk.
B) inadequate capital to handle a potential loss.
C) insolvency.
D) the problem of moral hazard.

106) The reinsurance market is characterized as having

A) a few buyers and many sellers.
B) many buyers and sellers.
C) few buyers and sellers.
D) many buyers and a few sellers.

107) Catastrophe bonds or "cat bonds" were developed

A) by reinsurance companies to finance their growth.
B) as an alternative to purchasing reinsurance.
C) prior to the creation of reinsurance companies but are being phased out.
D) by the U.S. government to provide insurance against national disasters.

108) Pension funds resemble life insurance companies in the sense that

A) the payoff occurs only occurs when a person dies.
B) they accept deposits.
C) they offer the ability to make premium payments today in return for a promised payment under specified future circumstances.
D) they both are better investments the longer you live.

109) Pension funds resemble insurance companies by

A) pooling the savings of only large investors.
B) accepting deposits.
C) spreading risk.
D) becoming better investments the longer you live.

110) In most companies, an employee must work for a number of years before qualifying for pension benefits. This process is referred to as

A) a defined-benefit period.
B) vesting.
C) regulated contribution period.
D) mandatory benefit pending.

111) Vesting can make job changes costly because

A) you may not be able to take your entire pension benefit from your previous job with you.
B) once you leave one job fully vested the only other pension you can be eligible for is Social Security.
C) you can only become fully vested in one company's pension.
D) vested employees earn higher returns on their funds.

112) Defined-benefit plans

A) are more common than defined-contribution plans.
B) pay a pension based on the amount contributed into the plan by the employee and employer.
C) do not require any responsibility on the part of the employer for the employees' retirement income.
D) usually require an employee to work a very long time for the same employer in order to reap a large benefit.

113) In a defined-contribution plan,

A) only the employee makes contributions into the fund.
B) the retirement benefits will vary with both the amount contributed and the performance of the fund.
C) the benefits are determined mainly by years of service.
D) no vesting is required; employees are eligible for benefits from the time they make their first contribution.

114) Pension plans can be thought of as the opposite of life insurance because life insurance

A) costs far more than pension plans.
B) companies spread risk while pension plans spread risk only within the company.
C) pays off when you die while the pension plan pays off if you do not die.
D) pools the savings of many, and pension plans do not.

115) Which one of the following statements is false?

A) Pension plans and life insurance are often both offered by the same institution.
B) Life insurance companies hold more in stocks than pension funds do.
C) Life insurance pays off when you die while the pension plan pays off if you do not die.
D) Pension plans and whole life insurance are both vehicles for saving.

116) The Social Security System in the United States is best described as a

A) defined benefits plan.
B) defined contribution plan.
C) employer funded plan.
D) pay-as-you-go system.

117) With the U.S. Social Security System, the burden of funding the system rests on the

A) current workers.
B) retirees.
C) federal government.
D) Social Security Administration.

118) The category of financial intermediaries called securities firms does not include which one of the following?

A) mutual funds
B) brokerages
C) investment banks
D) credit unions

119) The practice of "placing the issue" is conducted by

A) the underwriting services of investment banks.
B) mutual fund companies.
C) brokerage firms.
D) commercial banks.

120) The main risk that investment banks face from their underwriting services is that the

A) client may not pay for the service.
B) company issuing the securities may go bankrupt.
C) price investors pay for the security may be less than the guaranteed price to the issuing firm.
D) price paid by investors may exceed the guaranteed price to the issuing firm.

121) Which one of the following is not true about the information and advice investment bankers provide to clients? The information and advice

A) is public information that the bank compiles and makes available to anyone.
B) is highly valued if the fees paid for it are any indication of its value.
C) is often used to identify possible acquisition and merger candidates.
D) helps improve the allocation of resources across the economy.

122) Finance companies perform all of the following functions except

A) issue commercial paper and securities.
B) take deposits.
C) make loans.
D) lease equipment to firms.

123) Accounts receivable loans provided by finance companies provide firms with

A) start-up capital.
B) the ability to turn a liability into an asset.
C) the ability to turn a relatively illiquid asset into liquidity.
D) inventory loans.

124) Most finance companies specialize in one of three loan types. Which one of the following is not one of those three types?

A) consumer loans for purchases such as appliances
B) margin loans for buying stock
C) sales loans for purchases such as cars
D) business loans for firms to use to buy new equipment

125) A business needs a loan to help keep its shelves stocked. This is an example of

A) an inventory loan.
B) sales finance.
C) equipment leasing.
D) consumer finance.

126) The main difference between sales finance and consumer finance is

A) the type of borrower.
B) the size of the purchase involved.
C) the length of time until the loan has to be repaid.
D) one deals with equipment leasing and the other does not.

127) Congress chartered Sallie Mae to make loans to

A) homeowners.
B) customers of securities brokers.
C) small business owners.
D) students.

128) Fannie Mae, Ginnie Mae, and Freddie Mac are examples of

A) private regulatory bodies that supervise home mortgage lenders.
B) government-sponsored enterprises chartered to encourage home lending.
C) government-sponsored enterprises that were chartered to encourage small business loans.
D) government-sponsored enterprises that provide homeowners insurance to people that cannot obtain it from private insurers.

129) Government-sponsored enterprises like Fannie Mae and Freddie Mac usually borrow at interest rates that

A) are below what private lenders pay.
B) exceed what private lenders pay.
C) are the same as private lenders since they are really a private lender.
D) are slightly below the federal funds rate.

130) Fannie Mae, Freddie Mac, and similar government-sponsored enterprises obtain their funds from

A) the U.S. Treasury.
B) the Federal Reserve.
C) issuing commercial paper and bonds.
D) both the U.S. Treasury and the Federal Reserve.

131) In 2008, as a result of a run on government-sponsored enterprise debt, the U.S. Treasury placed Fannie Mae and Freddie Mac in

A) conservatorship.
B) receivership.
C) bankruptcy.
D) trusteeship.

132) Hedge funds

A) are strictly for millionaires.
B) are heavily regulated.
C) issue commercial paper and bonds.
D) always employ diversification techniques called "hedging."

133) Hedge funds can be described as

A) low risk.
B) moderate risk.
C) very high risk.
D) only as risky as the entire stock market as measured by an index such as the S&P 500.

134) The Volcker rule in the Dodd-Frank Act does which one of the following?

A) Creates a host of new agencies to streamline the regulatory process.
B) Increases oversight of specific institutions regarded as a systemic risk.
C) Introduces significant regulation of hedge funds.
D) Forbids insured depositories from proprietary trading.

135) The Dodd-Frank does all of the following except

A) sets out new rules for financial institutions and markets.
B) repeals the Glass-Steagall Act of 1933.
C) requires closer government oversight over key establishments called systemically important financial institutions.
D) sharply alters the authorities of the government agencies that govern the financial sector.