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Finance
Q:
Many intermediaries, such as banks, cannot be asset transformers and match maturities of their assets and liabilities.
Q:
The subprime crisis is a good example of the credit risk faced by financial institutions.
Q:
A corporate borrower failing to repay a loan on time due to equipment breakdowns is an example of firm specific credit risk.
Q:
Maintaining a diversified loan portfolio helps a bank reduce systematic credit risk.
Q:
Loan charge-offs do not lead to insolvency risk because when loans are written off both loans and liabilities are reduced.
Q:
Risk arising from unhedged positions in securities, currencies, and derivatives is called market risk.
Q:
The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets is called operational risk.
Q:
How do public pension plans differ in other countries? Has privatization worked overseas?
Q:
What are the main provisions of ERISA?
Q:
How sound is the PBGC? How much do firms pay for pension fund insurance? Describe President Bush's proposal to increase funding for PBGC.
Q:
How is Social Security different from a private defined benefit plan? When and why is Social Security projected to become insolvent?
Q:
An individual is considering contributing $4,000 per year to either a traditional or a Roth IRA. Payments would begin in one year. If she uses the traditional IRA, her contributions would be fully deductible. She is 40 years old and is in a 28% tax bracket. On either IRA she can earn 7%. When she retires at age 65 she believes she will be in a 28% tax bracket. Which type of IRA should she choose if she invests not only the $4,000 per year, but any tax savings due to the deductibility of her contributions in a taxable investment earning a pretax rate of 7%? She will withdraw all her money upon retirement and may owe taxes then, depending on the type of IRA chosen.
Q:
Why do employees increasingly prefer defined contribution plans to defined benefit plans?
Q:
Suppose that a corporate defined benefit plan had decided it will keep pension fund reserves equal to the present value of expected future pension benefits to be fully funded. The plan has expected payouts of $12 million per year for 15 years and then $22 million per year for the subsequent 10 years. All payments are at year-end. At the current 5.75% rate of return on the plan's assets, the plan is currently fully funded. If the plan can increase the proportion of stock investments the fund holds and raise the expected rate of return to 8.00%, how many dollars of pension assets can be freed up by the corporation?
Q:
A 55-year-old has just changed jobs and has a choice between a defined benefit plan [final pay] and a defined contribution plan. He will work for 10 more years. What should he consider in making his decision?
Q:
Why do insured pension plans invest in less risky assets than uninsured pension plans?
Q:
Social Security began running a deficit for the first time in what year?
A. 1990
B. 1995
C. 2000
D. 2005
E. 2010
Q:
A country where the link between public pension benefits and amounts paid in is weak is
A. Sweden
B. Italy
C. Great Britain
D. Chile
E. France
Q:
IRAs are
A. self-directed investment vehicles designed to provide supplemental retirement income.
B. corporate retirement plans for self-employed individuals and small businesses.
C. specific classes of investments such as equities or bonds issued by certain corporations.
D. investment vehicles created by ERISA.
E. special types of life insurance policies.
Q:
Vesting refers to
A. how long until an employee owns any employer contributions to the employee's pension plan.
B. how long until an employee can transfer any of their own contributions to a new plan if they switch jobs.
C. eligibility requirements to retire early.
D. restrictions on asset allocations within a defined contribution plan.
E. the extent to which an employee materially participated in a given business in a given year.
Q:
You want to have $1,200,000 when you retire and you are in a defined contribution plan. You can earn 9% per year on the money invested and you will retire in 25 years. Your employer also contributes to your plan. The employer will contribute 4% of what you put into the plan each year. How much do you have to contribute per year to meet your goal?
A. $18,435.43
B. $17,654.87
C. $16,879.32
D. $13,622.60
E. $15,999.44
Q:
Employee plus employer contributions to a 401(k) are $11,000 per year. Equity funds are earning 10%, bond funds 5%, and money market funds 3%. The employee will retire in 30 years. How much money will he have if he earns the average return from putting 65% of his money in equities, 30% in bond funds, and the rest in money market funds?
A. $1,280,925
B. $1,838,526
C. $1,654,320
D. $1,978,565
E. $1,248,550
Q:
An employee contributes 6% of her salary to her 401(k) plan and her employer contributes another $1,900. The employee earns $75,000 and is in a 28% tax bracket. If the employee earns 8.50% on all funds invested each year and her salary does not change, how much will she have in her account in 20 years?
A. $195,369
B. $213,133
C. $244,667
D. $289,055
E. $309,613
Q:
A defined benefit pension plan has expected payouts of $15 million per year for 8 years and then $20 million over the following 15 years. Actuaries have estimated that the fund can be expected to earn an average of 5.25% on its assets. The fund currently has reserves of $185,475,000. The plan is ___________ by about ___________ million.
A. underfunded; $100
B. underfunded; $59
C. overfunded; $30
D. overfunded; $24
E. underfunded; $46
Q:
The PBGC
I. insures participants of defined benefit plans if plan funds are insufficient to meet contractual pension obligations.
II. insures participants of defined contribution plans if investment returns are insufficient to meet expected pension obligations.
III. regulates day-to-day pension fund operations.
A. I only
B. II only
C. I and III only
D. II and III only
E. I, II, and III
Q:
ERISA established all but which one of the following?
A. Prudent man rule
B. Maximum vesting times
C. Minimum funding requirements
D. Insurance for pension plan participants
E. Minimum payouts for defined contribution plans
Q:
Under ERISA the maximum time period allowed for vesting is _____________ years.
A. 3
B. 5
C. 8
D. 10
E. 15
Q:
A retirement account specifically designed for self-employed persons is a
A. Roth IRA
B. traditional IRA
C. Keogh
D. Penny Benny
E. public pension plan
Q:
Which of the following is/are true about a Roth IRA?
I. Contributions are tax deductible.
II. Withdrawals after retirement are not taxed.
III. You must begin withdrawals at age 70 .
IV. Employers match contributions.
V. They are only available to individuals earning less than $50,000, or households earning less than $90,000.
A. I, II, and IV
B. II, IV, and V
C. I, III, and IV
D. II only
E. V only
Q:
Which of the following statements are true about a traditional IRA?
I. Subject to an income limit, in 2011 a single person could contribute up to $5,000 per year of pretax income to an IRA.
II. All withdrawals are tax-free.
III. Earnings on the IRA account are not taxed until withdrawn.
IV. You must begin withdrawals at age 59 .
V. Withdrawal(s) can be a lump sum or installments.
A. I, II, IV
B. I, II, IV, and V
C. I, III, and V
D. II, IV, and V
E. III, IV, and V
Q:
An employee contributes 9% of his salary to his 401(k) plan and the employer matches with 40% of the first 6% of the employee's salary. The employee earns $90,000 and is in a 28% tax bracket. If the employee earns 10% on the plan investments, what is his one-year rate of return relative to the net amount of money he invested?
A. 16.28%
B. 51.25%
C. 90.07%
D. 93.52%
E. 29.72%
Q:
Which of the following statements about 401(k) plans are true?
I. They are defined benefit plans.
II. They allow employer and employee contributions.
III. Earnings accrue tax-free during the employee's working years.
IV. They allow employee discretion in asset allocation.
V. They always have minimum guaranteed rates of return.
A. I, IV, and V only
B. I, II, and V only
C. II and III only
D. II, III, and IV only
E. all are true
Q:
A(n) ___________ plan does not require the employer to guarantee retirement benefits nor to maintain a minimum level of pension reserves.
A. defined benefit
B. insured pension
C. corporate pension
D. uninsured pension
E. defined contribution
Q:
Under ERISA, pension fund managers are required to invest fund assets as wisely as if they were investing their own money. This requirement is called the
A. owl rule.
B. vesting requirement.
C. 403(b) requirement.
D. prudent person rule.
E. funding rule.
Q:
The Pension Protection Act of 2006 requires companies to correct funding shortfalls in their defined benefit plans within:
A. 1 year
B. 3 years
C. 5 years
D. 10 years
E. 20 years
Q:
The main advantage of a profit sharing Keogh plan over a money-sharing Keogh plan is that profit sharing plans
A. are eligible for PBGC insurance and money sharing plans are not.
B. have higher maximum contributions than money sharing plans.
C. can have contributions that vary from year to year with profits, while money-sharing plan contributions are fixed.
D. both A and B are advantages
E. none of the above
Q:
An employee who has worked for his firm for 30 years can retire right now and receive a constant annual benefit of $45,000. He has a final pay plan that pays his average salary over his final 5 years times 2% times years of service. He has decided he will keep working five more years but only if by doing so his retirement benefits will grow at 6% per year. How much would his expected average salary (to the nearest dollar) have to be over the next 5 years to keep him working?
A. $54,198
B. $86,029
C. $51,617
D. $66,911
E. $53,147
Q:
At your new job you estimate that your average salary over your working years will be $95,000 per year. How many more years would you have to work to receive as much benefit from a flat benefit of $3,000 times years of service as you would receive from 3.75% of your average salary times years of service?
A. 1.33 times as many years
B. 0.75 times as many years
C. 1.19 times as many years
D. 2.40 times as many years
E. 1.50 times as many years
Q:
Congratulations, you have just been employed! You now have a choice between a flat benefit at retirement equal to $4,000 times your years of service, or a career average formula of 3.50% of your average salary times your years of service. You expect to work 40 years. At what average salary would you be indifferent between the two alternatives?
A. $160,000
B. $145,444
C. $114,286
D. $101,104
E. $98,976
Q:
In recent years defined contribution plans have grown faster than defined benefit plans in which of the following areas?
I. Fund assets
II. Number of funds
III. Number of plan participants
A. I only
B. I and II only
C. II and III only
D. I, II, and III
E. II only
Q:
In general terms, which one of the following plan types is the riskiest for an employee on a year-to-year basis?
A. Defined contribution plan invested in fixed income securities
B. Defined contribution plan invested in equities
C. Final pay defined benefit plan
D. Career average defined benefit plan
E. Overfunded defined benefit plan
Q:
Private pension funds are funds administered by
I. the federal government
II. state and local governments
III. insurance companies
IV. banks and mutual funds
A. I and II only
B. II and III only
C. III and IV only
D. II, III, and IV only
E. I and III only
Q:
A pension plan has promised to pay out $25 million per year over the next 15 years to its employees. Actuaries estimate the rate of return on the fund's assets will be 5.50%. What amount of pension fund reserves (to the nearest dollar) are needed for the plan to be fully funded?
A. $375,000,000
B. $310,945,678
C. $250,939,524
D. $202,345,555
E. $198,466,231
Q:
Assets in 401(k) plans are now greater than assets in private defined benefit plans.
Q:
If you are married and you and your spouse make $160,000 total per year you are not allowed to contribute to an IRA.
Q:
A defined benefit pension plan expects to pay out $25 million per year over the next 10 years to pensioners. The fund currently has $155 million in pension assets that are earning 10% per year. This plan is underfunded.
Q:
Pension contributions paid to insured pension funds and the assets purchased with these funds become the legal property of the insurance company and are not the legal property of the individual pension fund contributors.
Q:
Pension fund reserves held by life insurance companies represent about 50% of the typical life insurer's assets.
Q:
In terms of assets managed and numbers of plans, defined contribution plans are becoming more predominant and defined benefit plans are declining.
Q:
In a defined benefit plan, the retirement benefit will vary according to rates of return on pension fund reserves.
Q:
If you are terminated before you are fully vested in an employer-sponsored plan you may not get to keep previous contributions to your pension made by your employer.
Q:
If you believe that taxes are going to go up and you will likely have to pay a high tax rate when you retire, you will probably be better off with a Roth IRA than with a traditional IRA.
Q:
Noninsured pension plans generally invest in riskier assets than insured pension plans.
Q:
Most state and local pension funds are underfunded.
Q:
There are now Roth versions of 401(k) plans and 403(b) plans as well as Roth IRAs.
Q:
Pension plans administered by the federal government are called insured pension plans.
Q:
A Keogh plan is designed for self-employed individuals.
Q:
Of the different types of defined benefit plans, plans using the final pay method will usually produce the biggest retirement benefit to employees.
Q:
How are hedge fund expenses different from mutual fund expenses? What are hurdle rates and high water marks at a hedge fund? Why are these used?
Q:
Hedge funds may be classified into three types based on their investment strategies and risk level. What are the three types and their broad risk levels? Many different strategies exist in each type. List one example strategy in each type.
Q:
What are the primary differences between index funds and ETFs? What are two examples of ETFs?
Q:
What new rules have resulted from the mutual fund trading abuses?
Q:
In what ways are hedge funds different from mutual funds?
Q:
Why is it important to regulate the mutual fund industry?
Q:
Why do many mutual funds now offer three different classes of shares? What are the differences and what should you consider in choosing the classes?
Q:
An investor is considering two mutual funds. Fund A has a 5.75% front-end load and a 1.25% expense ratio. Fund B is no-load, but has a 2.25% expense ratio. If the investor plans on being in either fund for 6 years, which should they choose given that they have $16,000 to invest and both funds have gross returns of 12% per year? Fees are applied at each year-end to year-end asset values, but the load is taken out up-front only once.
Q:
On Monday an equity mutual fund has cash of $150 and stocks worth $900. The fund has 100 shares outstanding. On Tuesday the stocks fall in value to $800 and 10 shares are then redeemed by the fund. Assuming that the fund uses its cash first to cover redemptions, what is the one-day rate of return to the remaining fund shareholders, and how much cash and stock does the fund now have?
Q:
What are the four main categories of mutual fund trading abuses mentioned in the text? Explain the problem with each.
Q:
How do closed-end investment companies differ from open-end mutual funds?
Q:
How are money market mutual funds similar to and different from bank deposits?
Q:
What is the purpose of index funds? How does this differ from other equity mutual funds? Why are index funds growing in popularity?
Q:
Why are mutual funds popular with individual investors?
Q:
One of the recent trading abuses in the mutual fund industry was allowing selected investors to rapidly trade in and out of a mutual fund in order to profit on stale prices. This practice is called
A. diluted brokerage.
B. front running.
C. directed order flow.
D. soft dollar commissions.
E. market timing.
Q:
You are considering purchasing shares in a typical mutual fund that has three classes of shares outstanding: Class A, Class B, and Class C. If you purchase Class C shares you will pay
A. a back-end load and no 12b-1 fees.
B. a front-end load and a small 12b-1 fee, but eventually your shares will be converted to Class A shares.
C. no front-end load but a back-end load.
D. a back-end load and full 12b-1 fees.
E. a front-end load and full 12b-1 fees.
Q:
ETFs have several advantages over index funds including the ability to:
I. trade throughout the day at continuously updated prices.
II. purchase ETF shares on margin.
II. sell ETF shares short.
IV. sell the shares back to the fund.
A. I, II, and III only
B. I, III, and IV only
C. II, III, and IV only
D. II and III only
E. I, II, III, and IV
Q:
A fund that has a fixed number of shares outstanding and is traded on an exchange is called a(n)
A. open-end mutual fund
B. hybrid fund
C. market timing fund
D. index fund
E. closed-end fund
Q:
You wish to invest $17,445 in a mutual fund with a NAV of $26.03. The fund charges a front-end load of 4.50%. How many fund shares will you receive?
A. 595
B. 640
C. 616
D. 668
E. 628
Q:
A(n) ___________ fund must hold substantial cash reserves in order to meet fund redemptions from shareholders.
A. closed-end
B. REIT
C. open-end mutual
D. ETF
E. unit trusts
Q:
Which one of the following fund types is likely to have the lowest annual expense ratio?
A. Index funds
B. Equity funds
C. Bond funds
D. Balanced funds
E. Hybrid funds
Q:
You have $15,000 to invest in a mutual fund. You choose a fund with a 3.5% front load, a 1.75% management fee, and a 0.5% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year-end assets for simplicity. The gross annual return on the fund's shares was 12.50%. What was your net annual rate of return to the nearest basis point?
A. 9.97%
B. 6.12%
C. 9.25%
D. 5.42%
E. 8.56%