Mishkin 6ce TB Ch29

Economics of Money, Banking, and Financial Markets 6e (Mishkin)
Chapter 29 Web Chapter 3 Non-bank Finance
29.1 Insurance
1) Nonbank financial institution include ________.

A) mutual savings banks
B) money market mutual funds
C) commercial banks
D) life insurance companies
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: Web Chapter 3.1: Summarize the different types of insurance products and ways in
which insurance companies can reduce asymmetric information problems
2) Demutualization refers to ________.

A) the conversion of mutual insurance companies from being owned by policy holders to stock
holders
B) the conversion of mutual fund companies from being owned by policy holders to stock
holders
C) the conversion of insurance companies from being owned by stock holders to policy holders
D) the conversion of mutual fund companies from being owned by stock holders to policy
holders
Answer: B
Diff: 2 Type: MC
Skill: Recall
3) The conversion of insurance companies from being owned by policy holders to stock holders
is known as ________.
A) conversion
B) securitization
C) demutualization
D) regulation
Answer: C
Diff: 1 Type: MC
Skill: Recall
1
Copyright 2017 Pearson Canada, Inc.
4) Individual life insurance ________.
A) is regulated by the Bank of Canada
B) is sold one policy at a time
C) has been extremely volatile over time
D) is sold to a group of people at a time
Answer: B
Diff: 1 Type: MC
Skill: Recall
5) Group life insurance ________.

A) is sold to a single person under a group policy
B) is sold to a single person under a single policy
C) is sold to a group of people under a group policy
D) is sold to a group of people under a single policy
Answer: D
Diff: 2 Type: MC
Skill: Recall
6) Life insurance company regulation is the responsibility of ________.

A) the OSFI and Assuris
B) the Bank of Canada and Assuris
C) the OSFI and the CDIC
D) the OSFI and the Bank of Canada
Answer: A
Diff: 1 Type: MC
Skill: Recall
7) An example of permanent insurance is ________ insurance, and an example of temporary

insurance is ________ insurance.
A) term; variable life
B) term; whole life
C) whole life; variable life
D) whole life; term
Answer: D
Diff: 1 Type: MC
Skill: Recall
2
8) Permanent insurance is also known as ________.
A) endowment insurance
B) term insurance
C) group insurance
D) individual insurance
Answer: A
Diff: 1 Type: MC
Skill: Recall
9) Which of the following is an example of temporary life insurance?

A) The policy holder can borrow against the cash value.
B) It provides an annuity until death.
C) The premium is constant through the life of the policy.
D) The premium is matched every year to the amount needed to match against death.
Answer: D
Diff: 1 Type: MC
Skill: Recall
10) Which of the following is an example of permanent life insurance?

A) The policy has no the cash value.
B) It provides an annuity until death.
C) The premium is constant through the life of the policy.
D) The premium is matched every year to the amount needed to match against death.
Answer: C
Diff: 2 Type: MC
Skill: Recall
11) ________ policies have no cash value and provide insurance only.
A) Endowment insurance
B) Term life insurance
C) Permanent insurance
D) Annuity insurance
Answer: B
Diff: 1 Type: MC
Skill: Recall
3
12) ________ policies have a cash value which the policyholder can claim by cancelling the
policy.
A) Endowment insurance
B) Term life insurance
C) Permanent insurance
D) Annuity insurance
Answer: C
Diff: 1 Type: MC
Skill: Recall
13) Permanent life insurance is also known as ________.

A) endowment insurance
B) term life insurance
C) dowry insurance
D) annuity insurance
Answer: A
Diff: 1 Type: MC
Skill: Recall
14) ________ are arrangements whereby the customer pays an annual premium in exchange for
a future stream of annual payments beginning at a set age and continuing until death.
A) Endowments
B) Term life
C) Dowrys
D) Annuities
Answer: D
Diff: 1 Type: MC
Skill: Recall
15) Property insurance companies ________.

A) cover losses of real property
B) pay a sum of money if noncatastrophic events occur
C) provide income if a person dies, is incapacitated by illness, or retires
D) protect against legal liability exposures
Answer: A
Diff: 1 Type: MC
Skill: Recall
4
16) Casualty insurance companies ________.
A) cover losses of real property
B) pay a sum of money if noncatastrophic events occur
C) provide income if a person dies, is incapacitated by illness, or retires
D) protect against malpractice exposures
Answer: D
Diff: 1 Type: MC
Skill: Recall
17) Which of the following is likely to occur if lawsuits involving Property and Casualty
insurance and amounts awarded rise dramatically?
A) Insurance companies leave premiums unchanged
B) Insurance companies would raise premiums
C) Insurance companies hold less liquid assets to earn more income
D) Insurance companies keep insurance rates low
Answer: B
Diff: 2 Type: MC
Skill: Applied
18) Reinsurance ________.

A) allows the insured to reduce the premium by accepting a portion of the risk that would
otherwise be allocated to the insurance company
B) allows insurance companies to reduce their risks of exposure by allocating a portion of the
risk to another company in exchange for a portion of the premium
C) allows insurance companies to reduce their risks of exposure by allocating a portion of the
risk to the insured in exchange for a rebate on the premium
D) None of the above
Answer: B
Diff: 3 Type: MC
Skill: Recall
19) Reinsurance ________.

A) is additional insurance to the insurance owned by a person
B) is insurance for the insurance company
C) is a rebate on the premium
D) None of the above
Answer: B
Diff: 1 Type: MC
Skill: Recall
5
20) Issuing a ________ is the same as providing insurance on the debt instrument because, just
like insurance, it makes a payment to the holder when there is a negative credit event.
A) debit note
B) debit-default swap
C) credit-default swap
D) credit note
Answer: C
Diff: 1 Type: MC
Skill: Recall
21) The only insurance companies that are allowed to provide insurance that guarantees the
timely repayment of bond principal and interest when a debt issuer defaults are ________.
A) monoline insurance companies
B) bond insurance companies
C) debt insurance companies
D) credit insurance companies
Answer: A
Diff: 1 Type: MC
Skill: Recall
22) The Greek debt crisis increased ________.

A) credit default swap spreads
B) the value of eurodollar accounts
C) the credit rating of Greek corporations
D) the TSE index
Answer: A
Diff: 1 Type: MC
Skill: Recall
23) The Federal Reserve Board set up a ________ credit facility to provide liquidity to AIG.
A) $85 billion
B) $8.5 billion
C) $85 million
D) $8.5 million
Answer: A
Diff: 1 Type: MC
Skill: Recall
6
24) An insurance management tool to discourage policyholders from engaging in risky
activities that make an insurance claim more likely is known as a/an ________.
A) screening
B) restrictive provision
C) deductible
D) coinsurance
Answer: B
Diff: 1 Type: MC
Skill: Recall
25) To reduce adverse selection, insurance providers collect information on policyholders. This
is known as ________.
A) screening
B) provision
C) deduction
D) coinsurance
Answer: A
Diff: 1 Type: MC
Skill: Recall
26) An insurance management tool to reduce moral hazard is to ________.

A) charge risk-based premiums
B) not allow restrictive provisions
C) reduce the deductible to zero
D) prohibit coinsurance
Answer: A
Diff: 1 Type: MC
Skill: Recall
27) An insurance management tool to reduce moral hazard is to ________.

A) charge the same premium for different risks
B) limit the amount of insurance provided
C) reduce the deductible to zero
D) prohibit coinsurance
Answer: B
Diff: 1 Type: MC
Skill: Recall
7
28) How does the economic concept of adverse selection apply to the lending activities of
insurers? Provide an example.
Answer: In the case of an insurance policy, moral hazard arises when the existence of
insurance encourages the insured party to take risks that increase the likelihood of an insurance
payoff. For example, a person covered by burglary insurance might not take as many
precautions to prevent a burglary because the insurance company will reimburse most of the
losses if a theft occurs.
Diff: 3 Type: ES
Skill: Recall
29) How does the economic concept of moral hazard apply to the lending activities of insurers?
Provide an example.
Answer: Adverse selection holds that the people most likely to receive large insurance payoffs
are the ones who will want to purchase insurance the most. For example, a person suffering
from a terminal disease would want to take out the biggest life and medical insurance policies
possible, thereby exposing the insurance company to potentially large losses.
Diff: 3 Type: ES
Skill: Recall
30) List insurance management practices for lowering adverse selection and moral hazard.
Answer: Insurance management practices include: information collection and screening of
potential policyholders, risk-based premiums, restrictive provisions, prevention of fraud,
cancellation of insurance, deductibles, coinsurance, and limits on the amount of insurance.
Diff: 2 Type: ES
Skill: Recall
31) What is coinsurance? Provide an example.

Answer: When a policyholder shares a percentage of the losses along with the insurer, their
arrangement is called coinsurance. For example, some medical insurance plans provide
coverage for 80 percent of medical bills, and the insured person pays 20 percent after a certain
deductible has been met.
Diff: 2 Type: ES
Skill: Recall
8
29.2 Pension Funds
1) A defined-benefit plan ________.

A) has borrowed from the public
B) has purchased foreign currency
C) sets future income payments in advance
D) has agreed to make periodic payments for a specific period of time
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: Web Chapter 3.2: Summarize the distinctions between defined-benefit and defined-
contribution pensions, and the key features of private and public pension plans
2) ________ are financial intermediaries that provide the public with a kind of protection:
income payments on retirement.
A) Pension funds
B) Investment banks
C) Finance companies
D) Credit unions
Answer: A
Diff: 1 Type: MC
Skill: Recall
3) Which of the following is an example of a fully funded plan?

A) Contributions are sufficient to payout the benefits but earnings are not.
B) Contributions and earnings are not sufficient to payout the benefits.
C) Contributions and earnings are sufficient to payout the benefits.
D) Earnings are sufficient to payout the benefits but contributions are not.
Answer: C
Diff: 2 Type: MC
Skill: Recall
4) Which of the following is an example of an underfunded plan?

A) Contributions are sufficient to payout the benefits but earnings are not.
B) Contributions and earnings are not sufficient to payout the benefits.
C) Contributions and earnings are sufficient to payout the benefits.
D) Earnings are sufficient to payout the benefits but contributions are not.
Answer: B
Diff: 2 Type: MC
Skill: Recall
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5) In a defined-contribution plan future benefits ________.
A) are set in advance
B) are registered with the federal regulatory authority
C) are determined by the contributions into the plan and their earnings
D) are government administered
Answer: C
Diff: 1 Type: MC
Skill: Recall
6) A defined-contribution plan ________.

A) borrows from the public
B) purchases foreign currency
C) sets future income payments in advance
D) makes periodic payments for a specific period of time
Answer: D
Diff: 1 Type: MC
Skill: Recall
7) The primary assets of a pension fund are ________.

A) money market instruments
B) bonds, stock and long term mortgages
C) consumer and business loans
D) bonds, stock and short term mortgages
Answer: B
Diff: 1 Type: MC
Skill: Recall
8) Private pension plans ________.

A) are different from RRSPs
B) cannot be converted to annuity or a RRIF on retirement
C) are voluntary, employer-sponsored plans
D) are the same as RRSPs
Answer: C
Diff: 1 Type: MC
Skill: Recall
10
9) The Canada Pension Plan ________.
A) is a government-administered pension plan
B) is a "pay-as-you-go" system
C) is underfunded
D) All of the above
Answer: D
Diff: 1 Type: MC
Skill: Applied
10) Personal pension plans ________.

A) are different from RRSPs
B) cannot be converted to annuity or a RRIF on retirement
C) provide tax-sheltered, self-financed retirement funds
D) are government-administered
Answer: C
Diff: 1 Type: MC
Skill: Recall
11) What are three suggestions given for privatizing public pension plans?
Answer: 1. Government investment of trust fund assets in corporate securities.
2. Shift of trust fund assets to individual accounts that can be invested in private assets.
3. Individual accounts in addition to those in the trust funds.
Diff: 3 Type: ES
Skill: Recall
12) Discuss what RRSPs are and how they help to provide income at retirement.
Answer: RRSPs are personal pension plans that provide tax-sheltered, self financed retirement
funds. Upon retirement, an RRSP must be converted into an annuity or a Registered Retirement
Income Fund (RRIF), which provides taxable annuity payments.
Diff: 2 Type: ES
Skill: Recall
11
29.3 Finance Companies
1) The three types of finance companies are ________.

A) sales, investment, and business
B) credit, consumer, and business
C) sales, consumer, and business
D) credit, consumer, and bank
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: Web Chapter 3.3: List and describe the different types of finance companies
2) The financial intermediation process of ________ can be described by saying that they
borrow in large amounts but often lend in small amounts.
A) pension funds
B) investment banks
C) finance companies
D) credit unions
Answer: C
Diff: 1 Type: MC
Skill: Recall
3) Which of the following financial intermediaries is not a depository institution?

A) A savings and loan association
B) A commercial bank
C) A credit union
D) A finance company
Answer: D
Diff: 1 Type: MC
Skill: Recall
4) An investment intermediary that lends funds to consumers is ________.

A) a finance company
B) an investment bank
C) a finance fund
D) a consumer company
Answer: A
Diff: 1 Type: MC
Skill: Applied
12
5) Non-deposit taking financial institutions that acquire funds by issuing commercial paper or
stock and bonds or borrowing from banks, and that use the proceeds to make loans are known
as ________.
A) commodity companies
B) redistribution companies
C) barter companies
D) finance companies
Answer: D
Diff: 1 Type: MC
Skill: Recall
6) Finance companies are ________.

A) as heavily regulated as banks
B) unregulated compared to banks
C) federally regulated
D) nationally regulated
Answer: B
Diff: 1 Type: MC
Skill: Recall
7) Provincial regulation for finance companies does not cover any of the following except for
________.
A) the maximum amount they can loan to individual consumers
B) restrictions on branching
C) assets they hold
D) how they raise their funds
Answer: A
Diff: 3 Type: MC
Skill: Recall
8) Sales finance companies compete directly with banks for ________.

A) business loans
B) credit lines
C) consumer loans
D) deposit accounts
Answer: C
Diff: 1 Type: MC
Skill: Recall
13
9) Consumer finance companies typically make loans to consumers for all of the following
except to ________.
A) buy particular items such as furniture or home appliances
B) to make home improvements
C) purchase accounts receivables at a discount
D) refinance small debts
Answer: C
Diff: 2 Type: MC
Skill: Recall
10) Purchasing accounts receivable (bills owed to the firm) at a discount is known as
________.
A) loaning funds
B) leasing
C) factoring
D) purchasing
Answer: C
Diff: 1 Type: MC
Skill: Recall
11) Business finance companies also specialize in ________.

A) leasing equipment
B) derivatives
C) securitization
D) mortgages
Answer: A
Diff: 1 Type: MC
Skill: Recall
12) Why are consumers better off obtaining credit from sources other than consumer finance
companies?
Answer: Consumer finance companies are separate corporations from retailers or
manufacturing companies or are owned by banks. Typically, these companies charge higher
interest rates and make loans to consumers who cannot obtain credit from other sources.
Diff: 2 Type: ES
Skill: Recall
14
29.4 Securites Market Operations
1) Who assists in the initial sale of securities in the primary market?

A) The Bank of Canada
B) Business finance companies
C) Securities brokers
D) Investment banks
Answer: D
Diff: 1 Type: MC
Skill: Recall
Objective: Web Chapter 3.4: Summarize the roles of investment banks, securities brokers and
dealers, and organized exchanges in the securities market
2) Securities brokers and dealers, investment banks, and organized exchanges ________.
A) do not perform the intermediation function
B) can be thought of as "financial facilitators"
C) are important in the process of channelling funds from savers to spenders
D) All of the above
Answer: D
Diff: 3 Type: MC
Skill: Recall
3) Who assists in the initial sale of securities in the secondary market?

A) The Bank of Canada
B) Securities brokers
C) Business finance companies
D) Investment banks
Answer: B
Diff: 1 Type: MC
Skill: Recall
4) When a firm issuing new securities has previously issued securities, these previously issued
securities are called ________.
A) investment-grade issues
B) seasoned issues
C) an initial public offering
D) secondary issues
Answer: B
Diff: 1 Type: MC
Skill: Recall
15
5) When a firm is issuing new securities, this is called a(n) ________.
A) investment-grade issue
B) seasoned issue
C) initial public offering
D) secondary issue
Answer: C
Diff: 1 Type: MC
Skill: Recall
6) A(n) ________ is an example of a security which is currently selling on the market.

A) seasoned issue
B) new issue
C) IPO issue
D) current issue
Answer: A
Diff: 1 Type: MC
Skill: Recall
7) The financial market where a corporation or government issues securities is called

________.
A) a money market
B) a mercantile exchange
C) a debt market
D) a primary market
Answer: D
Diff: 1 Type: MC
Skill: Recall
8) The market in which previously issued securities can be resold is called ________.
A) a secondary market
B) a resale market
C) a debt market
D) an exchange market
Answer: A
Diff: 1 Type: MC
Skill: Recall
16
9) A corporation in order to issue new shares will have to use ________.
A) financial leverage
C) accumulated profits
D) debt
Answer: B
Diff: 1 Type: MC
Skill: Recall
10) The action of guaranteeing a price for a corporation's new issue of stocks is called
________.
A) securitization
B) hedging
C) intermediation
D) underwriting
Answer: D
Diff: 1 Type: MC
Skill: Recall
11) The institutions that assist in the trading of securities in the secondary market are called
________.
A) investors
B) stockholders
C) auditors
D) dealers
Answer: D
Diff: 1 Type: MC
Skill: Recall
12) An investment bank purchases securities from a corporation at a predetermined price and
then resells them in the market. This process is called ________.
A) underwriting
B) underhanded
C) understanding
D) undertaking
Answer: A
Diff: 1 Type: MC
Skill: Recall
17
13) Investment bankers that guarantee the corporation a price on the securities and then sell
them to the public are known as ________.
A) undertakers
B) securities brokers
C) underwriters
D) central bankers
Answer: C
Diff: 1 Type: MC
Skill: Recall
14) An investment bank helps ________ issue securities.

A) a corporation
B) the Canadian government
C) the OSC
D) foreign governments
Answer: A
Diff: 1 Type: MC
Skill: Recall
15) Which of the following transactions would involve an investment bank?

A) New shares of stock are issued by a corporation.
B) One corporation selling shares of another corporation.
C) A pension fund manager buys a bond in the secondary market.
D) An investor buying shares on the TSX.
Answer: A
Diff: 2 Type: MC
Skill: Recall
16) A financial institution that assists in the sale of securities in the primary market is the
________.
A) investment bank
B) commercial bank
C) stock exchange
D) brokerage house
Answer: A
Diff: 1 Type: MC
Skill: Recall
18
17) A corporation acquires new funds only when its securities are sold ________.
A) in the primary market by an investment bank
B) in the primary market by a stock exchange broker
C) in the secondary market by a securities dealer
D) in the secondary market by a commercial bank
Answer: A
Diff: 2 Type: MC
Skill: Recall
18) Brokerage firms engage in all of the following securities market activities except for acting
as ________.
A) brokers
B) dealers
C) central bankers
D) investment bankers
Answer: C
Diff: 1 Type: MC
Skill: Recall
19) The Toronto Stock Exchange was established in ________.

A) 1852
B) 1832
C) 1822
D) 1902
Answer: A
Diff: 1 Type: MC
Skill: Recall
20) Which of the following is true?

A) Insider information is public information.
B) Brokerage firms act as brokers, dealers, and investment bankers.
C) Dealers are pure intermediaries who act as agents.
D) Brokers make their living by selling securities at a higher price than what they paid for
them.
Answer: B
Diff: 2 Type: MC
Skill: Recall
19
21) The Toronto Stock Exchange (TSX) is ________.
A) an commodities exchange
C) a secondary market
D) a dealer
Answer: C
Diff: 1 Type: MC
Skill: Recall
22) Securities are traded on the floor of the exchange with the help of a special kind of dealer-
broker called a(n) ________.
A) underwriter
B) specialist
C) banker
D) manager
Answer: B
Diff: 1 Type: MC
Skill: Recall
23) Describe the underwriting process.

Answer: When the corporation decides which kind of financial instrument it will issue, it
offers them to underwritersinvestment bankers that guarantee the corporation a price on the
securities and then sell them to the public. If the issue is small, only one investment-banking
firm underwrites it (usually the original investment banking firm hired to provide advice on the
issue). If the issue is large, several investment-banking firms form a syndicate to underwrite the
issue jointly, thus limiting the risk that any one investment bank must take.
Diff: 3 Type: ES
Skill: Recall
20
29.5 Mutual Funds
1) Mutual funds were created ________.

A) in order to provide insurance to all households
B) in order to limit interest rates that are paid on deposits
C) to pool the savings of small investors and use the proceeds to invest on their behalf
D) A and B only
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: Web Chapter 3.5: Describe the role and activities of mutual funds in financial
intermediation
2) ________ are financial intermediaries that pool the resources of many small
investors by selling them shares and using the proceeds to buy securities.
A) Pension funds
B) Investment banks
C) Mutual funds
D) Credit unions
Answer: C
Diff: 1 Type: MC
Skill: Recall
intermediation
3) ________ are financial intermediaries that acquire funds by selling shares to many
individuals and using the proceeds to purchase diversified portfolios of stocks and bonds.
A) Mutual funds
B) Investment banks
C) Finance companies
D) Credit unions
Answer: A
Diff: 1 Type: MC
Skill: Recall
intermediation
4) Which of the following are financial intermediaries?

A) Life insurance companies
B) Mutual funds
C) Stock markets
D) State and local government retirement funds
Answer: B
Diff: 1 Type: MC
Skill: Recall
intermediation
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5) Which of the following are the primary assets mutual fund companies?
A) Securities
B) Consumer loans
C) Premiums from policies
D) All of the above
Answer: A
Diff: 1 Type: MC
Skill: Recall
intermediation
6) Shares in open-end funds are ________ while shares in closed-end funds are ________.
A) redeemable; not redeemable
B) not redeemable; redeemable
C) front load; no-load
D) no-load; front load
Answer: A
Diff: 1 Type: MC
Skill: Recall
intermediation
7) Institutional funds can be a concern because they ________.

A) have no clout with corporate boards
B) control a large share of total financial assets
C) lead to lower interest rates
D) include individuals between 50 and 70
Answer: B
Diff: 1 Type: MC
Skill: Recall
intermediation
8) ________ funds are state-owned investment funds that invest in foreign assets.
A) Private pension
B) Front load
C) Sovereign wealth
D) Foreign mutual
Answer: C
Diff: 1 Type: MC
Skill: Recall
intermediation
22
9) Sovereign wealth funds can be a concern because they ________.
A) could cause market instability
B) raise national security issues
C) are secretive
D) All of the above
Answer: A
Diff: 1 Type: MC
Skill: Recall
intermediation
10) Mutual funds are regulated by ________.

A) individual provinces
B) the federal government
C) the Mutual Fund Dealers Association of Canada
D) All of the above
Answer: A
Diff: 1 Type: MC
Skill: Recall
intermediation
11) Money-market mutual funds invest in ________.

A) stocks
B) bonds
C) short-term debt
D) short and long-term debt
Answer: C
Diff: 1 Type: MC
Skill: Recall
intermediation
12) How do sovereign wealth funds raise national security issues?

Answer: Sovereign wealth funds raise national security issues, because they might use their
investments for political purposes. They might buy up strategically important industries or use
their clout to get political concessions. This is a particular concern, because the governments of
Russia, China and Arab countries control many of the largest of these funds.
Diff: 3 Type: ES
Skill: Applied
intermediation
23
29.6 Hedge Funds
1) Which of the following is true about hedge funds?

A) Hedge funds are the same as mutual funds.
B) Hedge funds require that investors commit their funds short-term.
C) Hedge funds use strategies that avoid risk.
D) Hedge funds have a minimum investment requirement between $100,000 and $20 million.
Answer: D
Diff: 3 Type: MC
Skill: Recall
Objective: Web Chapter 3.6: Summarize the key distinctions between hedge funds and mutual
funds
2) Which of the following funds make investments in established businesses?

A) Capital buyout funds
B) Venture capital funds
C) Mutual funds
D) LBO funds
Answer: A
Diff: 1 Type: MC
Skill: Recall
funds
3) When a publicly traded firm is taken private by buying all of its shares, while financing the
purchase by increasing the debt of the firm, this is called ________.
A) a stock buyout
B) a leveraged buyout
C) a venture buyout
D) a debt buyout
Answer: B
Diff: 1 Type: MC
Skill: Recall
funds
4) In a private equity fund, investors are also ________.

A) managing partners
B) free-riding partners
C) limited partners
D) general partners
Answer: C
Diff: 1 Type: MC
Skill: Recall
funds
24
5) Market-neutral strategies include buying a(n) ________ security and sell ________ of a
higher valued security
A) cheap; more
B) cheap; less
C) expensive; less
D) expensive; more
Answer: A
Diff: 1 Type: MC
Skill: Recall
funds
29.7 Private Equity and Venture Capital Funds
1) In a venture capital funds, investors' money is invested in ________.

A) private equity investments
B) public company investments
C) mutual fund investments
D) government bond investments
Answer: A
Diff: 1 Type: MC
Skill: Recall
Objective: Web Chapter 3.7: Define private equity and venture capital, and summarize their
advantages as investment funds
2) Which of the following funds make investments in new startup businesses?

A) Capital buyout funds
B) Venture capital funds
C) Mutual funds
D) LBO funds
Answer: B
Diff: 1 Type: MC
Skill: Recall
25
3) Carried interest is ________.
A) the fee earned by a private equity fund for management of the equity fund investments
B) the percentage of profits earned by a private equity fund for management of the equity fund
investments
C) the interest charged by a private equity fund for short-selling the equity fund investments
D) the carry trade profits earned by a private equity fund for swapping the equity fund
investments
Answer: B
Diff: 1 Type: MC
Skill: Recall
4) Venture capital firms ________.

A) are an important driver of economic growth
B) are too highly leveraged to be important to economic growth
C) cannot be used as private equity funds
D) are rarely profitable due to large financial losses
Answer: A
Diff: 1 Type: MC
Skill: Recall
29.8 Government Financial Intermediation
1) Examples of crown finance companies are ________.

A) the Bank of Canada and the Office of the Superintendent of Financial Institutions Canada
B) the Bank of Canada and Canada Deposit Insurance Corporation
C) Farm Credit Canada and Export Development Canada
D) A and B only
Answer: C
Diff: 1 Type: MC
Skill: Recall
Objective: Web Chapter 3.8: Describe the two types of government financial intermediation
2) To promote housing and community development, the government has created ________.
A) the Canada Mortgage and Housing Corporation
B) Farm Credit Canada
C) Export Development Canada
D) the Canada Real Estate Corporation
Answer: A
Diff: 1 Type: MC
Skill: Recall
26
3) To provide loans to new and established farmers for any agricultural or farm-related
operation the government has created ________.
A) Farm Debit Canada
B) Farm Credit Canada
C) Farm Export Development Canada
D) Canada Farming Corporation
Answer: B
Diff: 1 Type: MC
Skill: Recall
4) To stimulate the export of Canadian goods and services, the government established
________.
A) Export Canada
B) Export Credit Canada
C) Export Development Canada
D) Canada Export Corporation
Answer: C
Diff: 1 Type: MC
Skill: Recall
5) To promote and assist in the establishment of business enterprises in Canada, the

government created ________.
A) the stock market
B) the bond market
C) the Business Development Bank
D) the Bank of Canada
Answer: C
Diff: 1 Type: MC
Skill: Recall
6) CMHC provides funds to the mortgage market by ________.

A) borrowing from the federal government
B) selling shares in CMHC
C) issuing mortgage-backed securities
D) borrowing from the Bank of Canada
Answer: A
Diff: 2 Type: MC
Skill: Recall
27
7) Farm Credit Canada sources its funds from ________.
A) the federal government
B) selling shares in domestic capital markets
C) selling its shares in foreign capital markets
D) the Bank of Canada
Answer: A
Diff: 2 Type: MC
Skill: Recall
8) The Business Development Bank of Canada raises money by ________.

A) issuing notes in domestic and foreign financial markets
B) selling shares in domestic capital markets
C) selling shares in foreign capital markets
D) borrowing from the federal government
Answer: D
Diff: 2 Type: MC
Skill: Recall
9) Fannie Mae and Freddie Mac ________.

A) are U.S. government agencies that provide funds to the mortgage market
B) are the names of U.S. central banks
C) demonstrated great stability during the subprime crisis
D) are pivot points in the business cycle
Answer: A
Diff: 1 Type: MC
Skill: Recall
10) According to critics, how did the Fed's involvement in organizing the rescue of Long-Term
Capital increase moral hazard?
Answer: Critics have argued that the Fed intervention increased moral hazard by weakening
discipline imposed by the market on fund managers because future Fed interventions of this
type would be expected.
Diff: 3 Type: ES
Skill: Recall
28

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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 29 Web Chapter 3 Non-bank Finance

1) Nonbank financial institution include ________.

2) Demutualization refers to ________.

5) Group life insurance ________.

6) Life insurance company regulation is the responsibility of ________.

7) An example of permanent insurance is ________ insurance, and an example of temporary

9) Which of the following is an example of temporary life insurance?

10) Which of the following is an example of permanent life insurance?

13) Permanent life insurance is also known as ________.

15) Property insurance companies ________.

18) Reinsurance ________.

19) Reinsurance ________.

22) The Greek debt crisis increased ________.

26) An insurance management tool to reduce moral hazard is to ________.

27) An insurance management tool to reduce moral hazard is to ________.

31) What is coinsurance? Provide an example.

1) A defined-benefit plan ________.

3) Which of the following is an example of a fully funded plan?

4) Which of the following is an example of an underfunded plan?

6) A defined-contribution plan ________.

7) The primary assets of a pension fund are ________.

8) Private pension plans ________.

10) Personal pension plans ________.

1) The three types of finance companies are ________.

3) Which of the following financial intermediaries is not a depository institution?

4) An investment intermediary that lends funds to consumers is ________.

6) Finance companies are ________.

8) Sales finance companies compete directly with banks for ________.

11) Business finance companies also specialize in ________.

1) Who assists in the initial sale of securities in the primary market?

3) Who assists in the initial sale of securities in the secondary market?

6) A(n) ________ is an example of a security which is currently selling on the market.

7) The financial market where a corporation or government issues securities is called

14) An investment bank helps ________ issue securities.

15) Which of the following transactions would involve an investment bank?

19) The Toronto Stock Exchange was established in ________.

20) Which of the following is true?

23) Describe the underwriting process.

1) Mutual funds were created ________.

4) Which of the following are financial intermediaries?

7) Institutional funds can be a concern because they ________.

10) Mutual funds are regulated by ________.

11) Money-market mutual funds invest in ________.

12) How do sovereign wealth funds raise national security issues?

1) Which of the following is true about hedge funds?

2) Which of the following funds make investments in established businesses?

4) In a private equity fund, investors are also ________.

29.7 Private Equity and Venture Capital Funds

1) In a venture capital funds, investors' money is invested in ________.

2) Which of the following funds make investments in new startup businesses?

4) Venture capital firms ________.

29.8 Government Financial Intermediation

1) Examples of crown finance companies are ________.

5) To promote and assist in the establishment of business enterprises in Canada, the

6) CMHC provides funds to the mortgage market by ________.

8) The Business Development Bank of Canada raises money by ________.

9) Fannie Mae and Freddie Mac ________.

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