Question 1

What is the difference between a defined contribution pension plan and a defined benefit plan?

In a defined contribution pension plan, the firm invests contributions for the employees, who own the value of the funds in the plan. In a defined benefit plan, the firm promises employees a particular dollar benefit payment based on each employee's earnings and years of service.

A defined benefit plan is more profitable for employees than a defined contribution pension plan.

In a defined benefit pension plan, the firm invests contributions for the employees, who own the value of the funds in the plan. In a defined contribution plan, the firm promises employees a particular dollar benefit payment based on each employee's earnings and years of service.

There are no differences between a defined contribution pension plan and a defined benefit plan.

Question 2

The most important bank liabilities are

Borrowings and Small-denomination time deposits.

Large-denomination time deposits and Checkable deposits.

Checkable deposits and Bank capital.

Small-denomination time deposits and Checkable deposits.

Question 3

Why might too much leverage be a problem for an investment bank?

Leverage magnifies profit, but it also magnifies loss.

Too much leverage cannot be a problem for an investment bank.

Too much leverage decreases the number of clients.

Too much leverage increases the book value against the market value of assets.

Question 4

How does deposit insurance encourage banks to take on too much risk?

Deposit insurance encourages banks to increase investments in riskless assets.

With deposit insurance, depositors have more incentive to withdraw their deposits if the managers make reckless investments.

Banks can make riskier investments because the government has insured banks against losses on their investments.

Banks can make riskier investments without worrying about deposit withdrawals because the government has insured depositors against losses.

Question 5

What are the key differences between mutual funds and hedge funds?

Mutual fund activities are more transparent and provide a list of the assets that the particular mutual fund owns. Hedge funds are generally less regulated and take more risks for higher returns.

Hedge funds are usually partnerships with a relatively small number of wealthy investors, whereas mutual funds usually involve large number of small investors.

A and B are correct.

Neither A nor B is correct.

Question 6

What does it mean to describe the foreign-exchange market as an over-the-counter market?

The market consists of customers linked together by computers.

The market consists of market makers linked together by computers.

The market is a physical place where currencies are traded.

The market consists of customers buying and selling in the foreign-exchange market directly.

Question 7

The most important bank assets are

Real estate loans and Commercial/industrial loans.

Reserves and Real estate loans.

Real estate loans and U.S. government/agency securities.

Consumer loans and Reserves.

Question 8

What is a run on a financial firm?

A run on a financial firm is not possible thanks to a government safety net.

A run on a financial firm is a rush to invest money before everyone else does.

A run on a financial firm is an attempt by investors to get their money out before the firm fails.

A run on a financial firm is the freezing of all current investing activities by investors.

Question 9

What effect has the SEC had on the level of asymmetric information in the U.S. financial system?

The SEC has been successful in completely eliminating the cost of asymmetric information.

After the SEC was founded, the level of asymmetric information in the U.S. financial system increased tremendously.

The SEC has been successful in reducing the cost of asymmetric information, but it has not eliminated it completely.

The SEC has not been successful in eliminating the cost of asymmetric information at all.

Question 10

Which of the following is true regarding the Securities and Exchange Commission (SEC)?

The SEC's primary role is to increase adverse selection by requiring the disclosure of financial and accounting information from all publicly traded firms.

The SEC is a federal government agency that regulates U.S. stock and bond markets.

The SEC's primary role is to reduce moral hazard by requiring the disclosure of financial and accounting information from all publicly traded firms.

Both B and C are correct.