As an employee of a large firm, you are given the choice between a defined benef
ID: 2813976 • Letter: A
Question
As an employee of a large firm, you are given the choice between a defined benefit pension plan and a defined contribution pension plan. What are the advantages of defined benefit pension plans for employees?
A.
The worker's retirement payout depends on the performance of the invested monies, so it is riskier.
B.
The implicit return to the plan may be fairly low if plan managers do not invest well.
C.
A worker's retirement payout is determined by a formula so that the worker bears no direct risk.
D.
The return may be higher, and the worker often has some control over how the money is invested.
What are the disadvantages of defined benefit pension plans for employees?
(Check
all that
apply.)
A.
The implicit return to the plan may be fairly low if plan managers do not invest well.
B.
The return may be higher, and the worker often has some control over how the money is invested.
C.
The worker has no control on how the money is invested and some plans do not adjust future payouts to keep pace with inflation.
D.
A worker could lose some pension benefits if the plan is underfunded or if the employer goes out of business.
E.
A worker's retirement payout is determined by a formula so that the worker bears no direct risk.
What are the advantages of defined contribution pension plans for employees?
A.
The return may be higher, and the worker often has some control over how the money is invested.
B.
The worker's retirement payout depends on the performance of the invested monies, so it is riskier.
C.
The implicit return to the plan may be fairly low if plan managers do not invest well.
D.
A worker's retirement payout is determined by a formula so that the worker bears no direct risk.
What are the disadvantages of defined contribution pension plan for employees?
A.
The return may be higher, and the worker often has some control over how the money is invested.
B.
A worker's retirement payout is determined by a formula so that the worker bears no direct risk.
C.
A worker's retirement payout is limited to his/her contribution.
D.
The worker's retirement payout depends on the performance of the invested monies, so it is riskier.
What is the shadow banking system?
A.
A small system of financial institutions that offer traditional banking services.
B.
A part of the banking system, which is not regulated by law.
C.
A collection of nonbank financial institutions that channel money from savers to borrowers.
D.
An addition to the commercial banking system, created by the Fed after the financial crisis, in order to reduce banking instability.
In what ways does the shadow banking system differ from the commercial banking system?
A.
The shadow banking system invests in more risky assets and tends to be highly leveraged than commercial banks.
B.
The shadow banking system, unlike the commercial banking system, does not offer traditional banking services such as taking in deposits.
C.
The commercial banking system, unlike the shadow banking system, is heavily regulated by the government.
D.
All of the above are correct.
[Related to the Making the Connection
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] What incentives would the partners in an investment bank have to turn it into a public corporation?
A.
Going public provides more access to capital and leverage.
B.
Going public eliminates the risk involved to the top executives, as it is not solely their money that is being risked.
C.
A and B are correct.
D.
Neither A, nor B is correct.
If becoming a public corporation increases the risk in investment banking, how do publicly traded investment banks succeed in selling stock to investors?
A.
Publicly traded investment banks have difficulty selling their stocks to investors.
B.
Publicly traded investment banks succeed in selling stock to investors regardless to the high risk because of backing by the Federal Reserve.
C.
Investors love to take high risks, hence they are willing to take the high risk of investing in highly-leveraged investment banks.
D.
Investors desire investment banks' stocks because of the potentially high profits of these banks due to their access to high leverage.
In March 2008, the U.S. Treasury and the Federal Reserve arranged for the sale of the Bear Stearns investment bank to JPMorgan Chase in order to prevent Bear Stearns from having to declare bankruptcy. A columnist for the New York Times noted:
It was an old-fashioned bank run that forced Bear Stearns to turn to the federal government for salvation....The difference is that Bear Stearns is not a commercialbank, and is therefore not eligible for the protections those banks received 75 years ago when Franklin D. Roosevelt halted bank runs with government guarantees.
Source: Floyd Norris, "F.D.R.'s Safety Net Gets a Big Stretch," New York
Times,
March 15, 2008.
How can an investment bank be subject to a run?
A.
It can be subject to a run when large sums are invested in bonds.
B.
It can be subject to a run if investors renew their repurchase agreements.
C.
It can be subject to a run when the Federal Reserve provides additional protection to commercial banks.
D.
It can be subject to a run when
investors do not renew their repurchase agreementsinvestors do not renew their repurchase agreements.
What "government guarantees" did commercial banks receive 75 years ago?
A.
This would refer to TARP.
B.
This would refer to the FDIC.
C.
This would refer to the SEC.
D.
This would refer to the CFTC.
How did these government guarantees halt commercial bank runs?
A.
In case of bankruptcy, the government promised to cover all losses with T-bills.
B.
The FDIC eliminated the incentive of a bank run because a depositor's money was insured if the bank failed.
C.
The government prevented deposit withdrawals by using extra taxation policy.
D.
In what ways are insurance companies financial intermediaries?
A.
Insurance companies are financial intermediaries because they research the financial market.
B.
Insurance companies are financial intermediaries because they offer people ways of investing money.
C.
Insurance companies are not financial intermediaries.
D.
Insurance companies are financial intermediaries because they obtain funds by charging premiums to policyholders and use these funds to make investments.
What is the difference between a life insurance company and a property and casualty insurance company?
A.
Life insurance companies typically make a profit on the insurance policies, whereas profits of property and casualty insurance companies come from investing the premiums.
B.
Property and casualty insurance companies typically make a profit on the insurance policies, whereas profits of life insurance companies come from investing the premiums.
C.
There is no difference between a life insurance company and a property and casualty insurance company.
D.
Life insurance insures against loss of life or disability, and property insurance insures against loss of property.
In what ways are contractual savings institutions similar to commercial banks?
A.
They both borrow long and lend short.
B.
They both provide monetary policies.
C.
They both borrow short and lend long.
D.
They both offer traditional banking activities, such as taking deposits and making loans.
In what ways are they different?
A.
Commercial banks do not borrow short and lend long like traditional commercial banks do.
B.
Contractual savings institutions do not accept deposits like traditional commercial banks do.
C.
Contractual savings institutions do not engage in the research of financial markets like commercial banks do.
D.
There are no differences between contractual savings institutions and commercial banks.
In an account of the financial crisis, Roger Lowenstein described the problems affecting the Merrill Lynch investment bank: "too much leverage, too much relying onshort-term [borrowing], and assets, especially real estate, of dubious value."
Source: Roger Lowenstein, The End of Wall
Street,
New York: Penguin Press, 2010, p. 172.
Why might too much leverage be a problem for an investment bank?
A.
Too much leverage decreases the number of clients.
B.
Too much leverage cannot be a problem for an investment bank.
C.
Leverage magnifies profit, but it also magnifies loss.
D.
Too much leverage increases the book value against the market value of assets.
Why might relying too much on short-term borrowing be a problem?
A.
Too much short-term borrowing exposes the firm to high rollover risk in addition to high credit risk.
B.
Short-term borrowing could be a problem because of the high interest rates usually charged by such loans.
C.
Relying too much on short-term borrowing cannot be a problem.
D.
Relying too much on short-term borrowing reduces profitability of investment banks due to increased transaction costs.
Under the FDIC, all commercial banks become nationalized.
Explanation / Answer
Answer : D Answer: C Answer: A Answer: D Answer: C Answer: D Answer: C Answer: D Answer: D Answer: B Answer: B Answer: D Answer: D Answer: C Answer: C Answer: C Answer: A Answer: C
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