Exam 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms

Many large manufacturing firms have subsidiaries that provide financing for the parent company's customer. These financial institutions are called free investment companies.

Hedge funds use a wide range of trading strategies and techniques in an attempt to earn superior returns.

Business entities include nonfinancial and financial enterprises. Nonfinancial enterprises manufacture products (e.g., cars, steel, computers) and/or provide nonfinancial services (e.g., transportation, utilities, computer programming).

The objective of a ________ is to earn a positive spread between the assets it invests in (what it has sold the money for) and the costs of its funds (what it has purchased the money for).

In addition to uncertainty about the timing and amount of the cash outlays, and the potential for the depositor or policyholder to withdraw cash early or borrow against a policy, a financial institution has to be concerned with possible reduction in cash inflows.

Name three of the five types of funds managed by asset management firms.

By the liabilities of a financial institution, we mean the amount and timing of the cash outlays that must be made to satisfy the contractual terms of the obligations issued. The liabilities of any financial institution can be categorized according to four types where the categorization assumes that the entity that must be paid the obligation will not cancel the financial institution's obligation prior to any actual or projected payout date. Using a table format, name and describe these four types.

________ is the risk that a counterparty in a trade fails to satisfy its obligation.

The costs of writing loan contracts are referred to as ________.

Which of the below statements is TRUE?

Which of the below statements is FALSE?

Very few regulations and tax considerations influence the investment policies that financial institutions pursue.

Which of the below is NOT one of the types of funds managed by asset management firms?

Describe the difference between direct and indirect investments. Cite an example of how an investor in a financial intermediaries makes an indirect investment in an actual entity or company.

A financial institution that provides an underwriting service will only on occasion also provide a brokerage and/or dealer service.

Financial intermediaries include ________ that acquire the bulk of their funds by offering their liabilities to the public mostly in the form of deposits; insurance companies, pension funds, and finance companies.

A convergence trading hedge fund is one in which the asset manager positions the portfolio to capitalize on the anticipated impact of a significant corporate event.

Depository institutions include ________.

Because of uncertainty about the timing and/or the amount of the cash outlays, a financial institution must be prepared ________.

To understand the reasons managers of financial institutions invest in particular types of financial assets and the types of investment strategies they use, it is necessary to have a general understanding of the ________ that they face.