THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 343

CHAPTER 12 Private equity funds make long-term investments in companies that are not traded publicly and are of two types: venture capital funds, which make investments in startups, and capital buyout funds, which make investments in established companies, often taking publicly traded firms private Nonbank Financial Institutions 311 federally sponsored agencies that function as private corporations with close ties to the government Because the government provides an implicit guarantee for GSE debt, market discipline to limit excessive risk-taking by GSEs is weak The resulting moral hazard problem has led to major taxpayer bailouts, especially the recent bailout of Fannie Mae and Freddie Mac, which involved US$200 billion of government funds To provide credit to residential housing and agriculture, the U.S government has created a number of government agencies Particularly important are government-sponsored enterprises (GSEs), which are KEY TERMS government-sponsored enterprises (GSE), p 308 permanent life insurance, p 289 brokerage firms, p 301 carried interest, p 307 group life insurance, p 289 private equity fund, p 307 capital buyout fund, p 307 hedge fund, p 305 private pension plans, p 297 closed-end fund, p 303 individual life insurance, p 289 reinsurance, p 291 credit default swap (CDS), p 291 institutional investors, p 303 seasoned issue, p 300 deductible, p 295 leveraged buyout (LBO), p 307 sovereign wealth funds, p 303 defined-benefit plan, p 296 load funds, p 303 specialist, p 302 defined-contribution plan, p 296 monoline insurance companies, p 291 temporary life insurance, p 290 annuities, p 290 demutualization, p 289 endowment insurance, p 290 fully funded, p 296 no-load funds, p 303 open-end fund, p 303 personal pension plans, p 299 underfunded, p 296 underwriters, p 301 venture capital funds, p 307 QUESTIONS You will find the answers to the questions marked with an asterisk in the Textbook Resources section of your MyEconLab *1 If death rates were to become less predictable than they are, how would life insurance companies change the types of assets they hold? Why property and casualty insurance companies have large holdings of liquid assets but life insurance companies not? *3 Why are all defined contribution pension plans fully funded? Why are restrictive provisions a necessary part of insurance policies? *9 If you needed to take out a loan, why might you first go to your local bank rather than to a finance company? 10 Explain why shares in closed-end mutual funds typically sell for less than the market value of the stocks they hold *11 Why might you buy a no-load mutual fund instead of a load fund? How can favourable tax treatment of pension plans encourage saving? 12 Why can a money market mutual fund allow its shareholders to redeem shares at a fixed price but other mutual funds cannot? *5 In contrast to private pension plans, government pension plans are rarely underfunded Is this statement true, false, or uncertain? Explain your answer *13 Why might government loan guarantees be a highcost way for the government to subsidize certain activities? What explains the widespread use of deductibles in insurance policies? 14 If you like to take risks, would you rather be a dealer, a broker, or a specialist? Why? *7 Why might insurance companies restrict the amount of insurance a policyholder can buy? *15 Is investment banking a good career for someone who is afraid of taking risks? Why or why not?