Question

14. One of the benefits achieved by financial institutions from promoting diversified financial services products is: a. Lower minimum capital requirements. b. Never having to incur FDIC insurance cost. c. Low correlation between revenue generated from traditional versus nontraditional products. d. Eliminating risk of failure.

15. Property casualty insurance companies invest in shorter term securities because: a. They are not allowed to invest in long-term securities. b. To avoid greater decline in securities value if market interest rates rise. c. They need to have sufficient liquidity to cover frequent claims resulting from property damage. d. Short term securities will result in lower tax liability from sale.

Answer 1

14. The correct answer is C

Diversification of financial services allows the financial institutions to offer products from different sectors. For example banks offering Insurance covers & investment management along with Loans & Deposits. Such move results into low correlation between the revenue from non traditional services (Insurance covers & Investment Management) versus Traditional products (Loans & deposits). Because of different streams cash flows from in different direction at different times resulting in lowering the risk of failure.

15. The correct answer is C

Property Casualty insurers invest largely in high-quality liquid securities which can be sold quickly to pay claims resulting from a major natural disaster or man-made disaster such as a terrorist attack. These Companies have shorter maturities as compared to other insurance companies, for instance Life Insurance Companies.