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Financial Markets and Institutions 6th edition Anthony Saunders, Marcia Cornett - Solutions
You deposit $ 10,000 annually into a life insurance fund for the next 10 years, after which time you plan to retire. a. If the deposits are made at the beginning of the year and earn an interest rate of 8 percent, what will be the amount in the retirement fund at the end of year 10? b. Instead of a
You deposit $ 12,000 annually into a life insurance fund for the next 30 years, after which time you plan to retire. a. If the deposits are made at the beginning of the year and earn an interest rate of 7 percent, what will be the amount of retirement funds at the end of year 30? b. Instead of
Calculate the following: a. Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $ 20,000 per year until the end of that person’s life. The insurance company expects this person to live for 15 more years and would be willing to pay 6 percent on the
Calculate the following: a. Suppose a 60-year-old person wants to purchase an annuity from an insurance company that would pay $ 15,000 per year until the end of that person’s life. The insurance company expects this person to live for 20 more years and would be willing to pay 5 percent on the
A property–casualty insurer brings in $ 6.25 million in premiums on its homeowners MP line of insurance. The line’s losses amount to $ 4,343,750, expenses are $ 1,593,750, and dividends are $ 156,250. The insurer earns $ 218,750 in the investment of its premiums. Calculate the line’s loss
A property–casualty insurer brings in $ 5.55 million in premiums on its homeowners multiple line of insurance. The line’s losses amount to $ 3,962,700, expenses are $ 1,526,250, and dividends are $ 333,000. The insurer earns $ 349,650 in the investment of its premiums. Calculate the line’s
Calculate the following: a. If the loss ratio on a line of property insurance is 73 percent, the loss adjustment expense is 12.5 percent, and the ratio of commissions and other acquisitions expenses is 18 percent, is this line profitable? b. How does your answer to part (a) change if investment
An insurance company’s projected loss ratio is 77.5 percent, and its loss adjustment expense ratio is 12.9 percent. It estimates that commission payments and dividends to policyholders will add another 16 percent. What is the minimum yield on investments required in order to maintain a positive
An insurance company’s projected loss ratio is 64.8 percent and its loss adjustment expense ratio is 25.6 percent. The company estimates that commission payments and dividends to policyholders will be 6 percent. What must be the minimum yield on investments to achieve a positive operating ratio?
An insurance company collected $ 3.6 million in premiums, and disbursed $ 1.96 million in losses. Loss adjustment expenses amounted to 6.6 percent and dividends paid to policyholders totaled 1.2 percent. The total income generated from their investments was $ 170,000 after all expenses were paid.
An insurance company collected $ 12.75 million in premiums and disbursed $ 9.18 million in losses. Loss adjustment expenses amounted to 20.1 percent and dividends paid to policyholders totaled 5 percent. The total income generated from the company’s investments was $ 1,420,000 after all expenses
In what ways are securities firms and investment banks financial intermediaries?
What three factors accounted for the resurgence in profits for securities firms from 1991 to 2000?
How has the size of the securities firm and investment banking industry changed since the late 1980s?
What are the different firms in the securities industry and how do they differ from each other?
Contrast the activities of securities firms with depository institutions and insurance firms.
What are the key activity areas for securities firms? How does each activity area assist in the generation of profits and what are the major risks for each area?
Explain the difference between the investing and investment banking activities performed by securities firms and investment banks.
What is the difference between pure arbitrage and risk arbitrage? If an investor observes the price of a stock trading in one exchange to be different from its price in another exchange, what form of arbitrage is applicable and how could the investor participate in that arbitrage?
How do agency transactions differ from principal transactions for market makers?
Why have brokerage commissions earned by securities firms fallen since 1977?
What factors contributed to the significant decrease in profits for securities firms in the early 2000s and the resurgence in profits in the middle of the first decade of the 2000s?
How did the financial crisis affect the performance of securities firms and investment banks?
What was the largest single asset and largest single liability of securities firms in 2013?
An investor notices that an ounce of gold is priced at $ 1,318 in London and $ 1,325 in New York. What action could the investor take to try to profit from the price discrepancy? Which of the six trading activities would this be? What might be some impediments to the success of the transaction?
Using Table which type of security accounts for most underwriting in the United States? Which is likely to be more costly to underwrite: corporate debt or equity? Why?
What was the significance of the National Securities Markets Improvement Act of 1996?
Identify the major regulatory organizations that are involved with the daily operations of the investment securities industry, and explain their role in providing smoothly operating markets.
What have been the trends in global securities trading and underwriting in the 1990s— 2010s?
An investment bank agrees to underwrite an issue of 15 mil-lion shares of stock for Looney Landscaping Corp. a. The investment bank underwrites the stock on a firm commitment basis, and agrees to pay $ 12.50 per share to Looney Landscaping Corp. for the 15 million shares of stock. The investment
An investment bank agrees to underwrite a $ 500 million, 10-year, 8 percent semiannual bond issue for KDO Corporation on a firm commitment basis. The investment bank pays KDO on Thursday and plans to begin a public sale on Friday. What type of interest rate movement does the investment bank fear
An investment bank pays $ 23.50 per share for 3,000,000 shares of the KDO Company. It then sells these shares to the public for $ 25. How much money does KDO receive? What is the investment banker’s profit? What is the stock price of KDO?
An investment bank pays $ 33.50 per share for 4 million shares of GM Company in a firm commitment stock offering. It then can sell those shares to the public for $ 32 per share. How much money does GM receive? What is the profit to the investment bank? What is the stock price of GM?
The MEP Company has issued 5,000,000 new shares. Its investment bank agrees to underwrite these shares on a best efforts basis. The investment bank is able to sell 4,200,000 shares for $ 54 per share. It charges MEP $ 1.25 per share sold. How much money does MEP receive? What is the investment
XYZ, Inc., has issued 10 million new shares of stock. An investment bank agrees to underwrite these shares on a best efforts basis. The investment bank is able to sell 8.4 million shares for $ 27 per share, and it charges XYZ $ 0.675 per share sold. How much money does XYZ receive? What is the
What is a mutual fund? In what sense is it a financial institution?
What are the three components of the return that an investor receives from a mutual fund?
What benefits do mutual funds have for individual investors?
What are long-term mutual funds? In what assets do these funds usually invest? What factors caused the strong growth in this type of fund during the 1990s and the decline in growth in the early and late 2000s?
What are money market mutual funds? In what assets do these funds typically invest? What factors caused the strong growth in this type of fund over various periods from 1992 through 2009?
Using the data in Table, discuss the growth and ownership holdings over the last 30 years of long-term funds versus money market funds?
How does the risk of short-term funds differ from that of long-term funds?
What are the economic reasons for the existence of mutual funds?
What are the principal demographics of household owners of mutual funds?
What is the difference between an open-end mutual fund and a closed-end fund? What is the difference between an open-end mutual fund and a unit investment trust?
What is the difference between an open-end mutual fund and an ETF closed-end fund? What is the difference between an open-end mutual fund and a unit investment trust?
What change in regulatory guidelines occurred in 2009 that had the primary purpose of giving investors a better understanding of the risks and objectives of a mutual fund?
How is the net asset value (NAV) of a mutual fund deter-mined? What is meant by the term marked-to-market daily?
How might an individual’s preference for a mutual fund’s objective change over time?
What is the difference between a load fund and a no-load fund? Is the argument that load funds are more closely managed and therefore have higher returns supported by the evidence presented in Table?
What is a 12b-1 fee? Suppose that you have a choice between two mutual funds, one a load fund with no annual 12b-1 fees, and the other a no-load fund with a maximum 12b-1 fee. How would the length of your expected holding period influence your choice between these two funds?
Why did the proportion of equities in long-term mutual funds increase from 38.3 percent in 1990 to 70.0 percent in 2007 and decrease back to 55.5 percent in 2008? How might an investor’s preference for a mutual fund’s objective change over time?
Who are the primary regulators of the mutual fund industry? How do their regulatory goals differ from those of other types of financial institutions?
Discuss the improper trading abuses and improper assignment of fees for which mutual funds were prosecuted in the early 2000s.
How have global mutual funds grown relative to U. S. – based mutual funds?
What is a hedge fund and how is it different from a mutual fund?
What are the different categories of hedge funds?
What types of fees do hedge funds charge?
What is the difference between domestic hedge funds and offshore hedge funds? Describe the advantages of offshore hedge funds over domestic hedge funds.
An investor purchases a mutual fund for $ 50. The fund pays dividends of $ 1.50, distributes a capital gain of $ 2, and charges a fee of $ 2 when the fund is sold one year later for $ 52.50. What is the net rate of return from this investment?
A mutual fund has 300 shares of General Electric, currently trading at $ 22, and 400 shares of Microsoft, Inc., currently trading at $ 28. The fund has 1,000 shares outstanding. a. What is the NAV of the fund? b. If investors expect the price of General Electric to increase to $ 26 and the price of
An investor purchases a mutual fund share for $ 100. The fund pays dividends of $ 3, distributes a capital gain of $ 4, and charges a fee of $ 2 when the fund is sold one year later for $ 105. What is the net rate of return from this investment?
Open-end Fund A has 165 shares of ATT valued at $ 35 each and 50 shares of Toro valued at $ 45 each. Closed-end Fund B has 75 shares of ATT and 100 shares of Toro. Both funds have 1,000 shares outstanding. a. What is the NAV of each fund using these prices? b. If the price of ATT stock increases to
Suppose today a mutual fund contains 2,000 shares of J. P. Morgan Chase, currently trading at $ 46.75, 1,000 shares of Walmart, currently trading at $ 70.10, and 2,500 shares of Pfizer, currently trading at $ 27.50. The mutual fund has no liabilities and 10,000 shares outstanding held by investors.
Suppose an individual invests $ 20,000 in a load mutual fund for two years. The load fee entails an up- front commission charge of 2.5 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.55 percent. The
Suppose an individual invests $ 10,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 4 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.85 percent. The
Describe the difference between a private pension fund and a public pension fund.
Describe the difference between an insured pension fund and a noninsured pension fund. What type of financial institutions would administer each of these?
Describe the difference between a defined benefit pension fund and a defined contribution pension fund.
What are the three types of formulas used to determine pension benefits for defined benefit pension funds? Describe each.
What have the trends been for assets invested in defined benefit versus defined contribution pension funds in the last three decades?
Describe the trend in assets invested in 401(k) plans in the 1990s and 2000s.
What is the difference between an IRA and a Keogh account?
Describe the “pay as you go” funding method that is used by many federal and state or local government pension funds. What is the problem with this method that may damage the long- term viability of such funds?
Describe the different pension funds sponsored by the federal government?
What are the major assets held by private pension funds in 1975 versus 2013? Explain the differences.
How do the financial asset holdings of defined benefit pension funds differ from those of defined contribution pension funds? Explain the differences.
Describe the issues associated with the long- term viability of the Social Security fund.
Describe the major features of ERISA.
What types of pension reforms have countries tried as their populations age and contributions to pension funds decrease?
Your employer uses a flat benefit formula to determine retirement payments to its employees. The fund pays an annual benefit of $ 2,500 per year of service. Calculate your annual benefit payments for 25, 28, and 30 years of service.
An employer uses a career average formula to determine retirement payments to its employees. The annual retirement payout is 5 percent of an employee’s career average salary times the number of years of service. Calculate the annual benefit payment under the following scenarios. YearsCareer
An employer uses a final pay formula to determine retirement payouts to its employees. The annual payout is 3 percent of the average salary over the employees’ last three years of service times the total years employed. Calculate the annual benefit under the following scenarios. Years
Using the information in Problem 7, and assuming all variables remain constant over the next 25 years, what will your 401(k) fund value be in 25 years (when you expect to retire)?
Using the information in Problem 9, and assuming all variables remain constant over the next 15 years, what will your 401(k) fund value be in 15 years (when you expect to retire)?
An employee with 25 years of service at a company is considering retirement at some time in the next 10 years. The employer uses a final pay benefit formula by which the employee receives an annual benefit payment of 3.5 percent of her average salary during her last five years of service times her
Your company sponsors a 401(k) plan into which you deposit 12 percent of your $ 60,000 annual income. Your company matches 50 percent of the first 5 percent of your earnings. You expect the fund to yield 10 percent next year. If you are currently in the 31 percent tax bracket, what is your annual
Your company sponsors a 401(k) plan into which you deposit 10 percent of your $ 120,000 annual income. Your company matches 75 percent of the first 10 percent of your earnings. You expect the fund to yield 12 percent next year. If you are currently in the 31 percent tax bracket, what is your annual
An employee contributes $ 15,000 to a 401(k) plan each year, and the company matches 10 percent of this annually, or $ 1,500. The employee can allocate the contributions among equities (earning 12 percent annually), bonds (earning 5 percent annually), and money market securities (earning 3 percent
What is credit risk? Which types of FIs are more susceptible to this type of risk? Why?
What is the difference between firm-specific credit risk and systemic credit risk? How can an FI alleviate firm-specific credit risk?
In the 1980s, much thrift that failed had made loans to oil companies located in Louisiana, Texas, and Oklahoma. When oil prices fell, these companies the regional economy, and the thrifts all experienced financial problems. What types of risk were inherent in the loans that these thrifts had made?
What is liquidity risk? What routine operating factors allow FIs to deal with this risk in times of normal economic activity? What market reality can create severe financial difficulty for an FI in times of extreme liquidity crises?
Which type of cash withdrawal presents very little liquidity risk? Which type of cash withdrawal is a source of significant liquidity risk for DIs?
What is the process of asset transformation performed by a financial institution? Why does this process often lead to the creation of interest rate risk? What is interest rate risk?
What is refinancing risk? How is refinancing risk part of interest rate risk? If an FI funds long-term fixed-rate assets with short-term liabilities, what will be the impact on earnings of an increase in the rate of interest? A decrease in the rate of interest?
What is reinvestment risk? How is reinvestment risk part of interest rate risk? If an FI funds short-term assets with long-term liabilities, what will be the impact on earnings of a decrease in the rate of interest? An increase in the rate of interest?
The sales literature of a mutual fund claims that the fund has no risk exposure since it invests exclusively in default risk-free federal government securities. Is this claim true? Why or why not?
How can interest rate risk adversely affect the economic or market value of an FI?
How does a policy of matching the maturities of assets and liabilities work (a) to minimize interest rate risk and (b) against the asset-transformation function for FIs?
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