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Question 1

Insurance companies' attempts to minimize adverse selection and moral hazard by the use of the following insurance practices:
A, Risk-assessment screening
B, Risk-based premiums
C, Restrictive provisions
D, all of the above
E, only A and B

Answer 1

D, all of the above

Question 2

Which of the following executive compensations is not conditional on the performance of a firm?
A, Stock options
B, Salaries
C, Bonus
D, Golden parachutes

Answer 2

B, Salaries

Question 3

Which of the following statement is true?
A, an agency relationship is based on trust
B, a fiduciary relationship is one based on impplicit contract
C, a fiduciary relationship is one based on explicit contract
D, a fiduciary relationship is one based on trust

Answer 3

D, a fiduciary relationship is one based on trust

Question 4

A company's pension plan promises employees a specific amount of income when they retire. However, the plan does not have the assets to meet these future obligations to employees. This plan represents a defined- \_\_\_\_ plann that is \_\_\_\_
A, Benefit; overfunded
B, Contribution; overfunded
C, Contribution, underfunded
D, Benefit, underfunded

Answer 4

D, Benefit, underfunded

Question 5

A higher price earnings ratio (PE) than the average industry’s PE gives what interpretation?
A, The market expects the firm’s earnings to rise in the future
B, the market feels the firm’s earnings are very ihigh risk arnd are willing to pay a premium for them
C, the market expects the firms share prices and the earnings to rise in the future
D, the markets expects the firms share prices to rise in the future

Answer 5

A, The market expects the firm’s earnings to rise in the future

Question 6

Cash flow to investors is equal to the sum of the:
A, Operation cash flow to the firm and dividens
B, capital spending minus cash dividens
C, Cash flow to the firm
D, Cash flow to creditors

Answer 6

C, Cash flow to the firm

Question 7

In percentage terms, higher coupon bonds experience a \_\_\_\_ price change compared with lower coupon bonds of the same amturity given a change in yield to maturity
A, similar
B, greater
C, smaller
D, None

Answer 7

C, smaller

Question 8

The primary function of investment banks is to:
A, extend credit to stock brokers and dealers
B, extend credit to investors
C, help corporations issue new securities
D, extend credit to corporations

Answer 8

C, help corporations issue new securities

Question 9

The largest share of life insurance companies' assets are\_\_\_\_
A, corporate stock
B, government securities
C, corporate bonds
D, cash reserves

Answer 9

C, corporate bonds

Question 10

In the case of an insurance policy, ____ occurs when the existance of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ____ occurs when those ost likely to get large insurance payoffs are the ones who want to purchase insurance the most
A, Adverser selection; moral hazard
B. moral hazard: insurance market discrimination
D, moral hazard: insurance segregation

Answer 10

B. moral hazard: insurance market discriminatio

Question 11

Large-denomiation CDs are \_\_\_\_, so that like a bond they can be resold in a \_\_\_\_ market before they mature
A, nonnegotiable; secondary
B, nonnegotiable; primary
C, negotiable; secondary
D. Negotiable; primary

Answer 11

C, negotiable; secondary

Question 12

Banker's concern regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deopsit outflows is an example of:
A, liability management
B, managing interest-rate risk
C, liquidity management
D, none of the above

Answer 12

C, liquidity management