A life insurance policy is a financial contract that collects a premium of p per period...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
A life insurance policy is a financial contract that collects a premium of p per period from the insured and pays out a lump sum benefit B upon the death of the insured. Let m denote the mortality rate, r denote the interest rate and V denote the expected present value of economic profits of the insurance company on this policy. Use the recursive asset pricing formula p + EV' V =! 1+r to express equilibrium life insurance premium, p, through exogenous variables. Explain your answer and show all work. (iii) Loan calculators Suppose that loan of size S is repaid over T periods with equal per-period payments p and interest rate on the loan r. Initial loan size has to be equal to the present value of the payments: S = 1+r' (1+r)2 +...+ (1+ r)T a) Calculate a monthly payment on the following mortgage. Annual interest rate is r = 0.06, mortgage term is 30 years, loan size S = 200,000. (Hint: since you are asked about the monthly payment, present value should be discounted at a monthly frequency. Start with figuring out the monthly interest rate and the mortgage term expressed in months, then apply the formula). b) Jill would like to buy a car that costs S = 20,000. The dealer offers her a 60-month loan with 0 down and a monthly payment p = 421. Calculate the annual interest rate on this loan using Excel. Take the following steps: 1. Generate a column of 40 monthly interest rates, with r = {0.001,0.002,.,0.040}, say column A, starting with Al. 2. Use the geometric series formula to express the present value of payments through p,T and rm, where rm is the monthly interest rate. Plug in the numeric value for p, T and put this formula into cell B1. Have the formula refer to the interest rate from cell Al. Select B1:B100 and press CTRL+D. This will copy the formula and generate a column of present values that correspond to different monthly interest rate. Pick an interest rate from a row whose cell B value corresponds most closely to S. 3. Convert the monthly interest rate rm that you found on step 2 into annual using the compounding formula 1+ ra = (1+ rm)12. A life insurance policy is a financial contract that collects a premium of p per period from the insured and pays out a lump sum benefit B upon the death of the insured. Let m denote the mortality rate, r denote the interest rate and V denote the expected present value of economic profits of the insurance company on this policy. Use the recursive asset pricing formula p + EV' V =! 1+r to express equilibrium life insurance premium, p, through exogenous variables. Explain your answer and show all work. (iii) Loan calculators Suppose that loan of size S is repaid over T periods with equal per-period payments p and interest rate on the loan r. Initial loan size has to be equal to the present value of the payments: S = 1+r' (1+r)2 +...+ (1+ r)T a) Calculate a monthly payment on the following mortgage. Annual interest rate is r = 0.06, mortgage term is 30 years, loan size S = 200,000. (Hint: since you are asked about the monthly payment, present value should be discounted at a monthly frequency. Start with figuring out the monthly interest rate and the mortgage term expressed in months, then apply the formula). b) Jill would like to buy a car that costs S = 20,000. The dealer offers her a 60-month loan with 0 down and a monthly payment p = 421. Calculate the annual interest rate on this loan using Excel. Take the following steps: 1. Generate a column of 40 monthly interest rates, with r = {0.001,0.002,.,0.040}, say column A, starting with Al. 2. Use the geometric series formula to express the present value of payments through p,T and rm, where rm is the monthly interest rate. Plug in the numeric value for p, T and put this formula into cell B1. Have the formula refer to the interest rate from cell Al. Select B1:B100 and press CTRL+D. This will copy the formula and generate a column of present values that correspond to different monthly interest rate. Pick an interest rate from a row whose cell B value corresponds most closely to S. 3. Convert the monthly interest rate rm that you found on step 2 into annual using the compounding formula 1+ ra = (1+ rm)12.
Expert Answer:
Answer rating: 100% (QA)
The Monthly payment can be calculated as Loan SizeX1... View the full answer
Related Book For
Principles of Risk Management and Insurance
ISBN: 978-0132992916
12th edition
Authors: George E. Rejda, Michael McNamara
Posted Date:
Students also viewed these finance questions
-
Your rich uncle dies, leaving you a life insurance policy worth $100,000. The insurance company also offers you an option to receive $8,225 per year for 20 years, with the first payment due today....
-
A life insurance policy is a financial asset, with the premiums paid representing the investments cost. a. How would you calculate the expected return on a 1-year life insurance policy? b. Suppose...
-
A life insurance policy is a financial asset. The premiums paid represent the investments cost. a. How would you calculate the expected return on a life insurance policy? b. Suppose the owner of a...
-
Sally works as a welder at Heavy Iron Works Company. She is the only female welder in a shop with ten male welders. Teddy is the manager of that shop with Sally and the ten male welders. Sally is...
-
Consider all the data stores shown in Figure. Draw an E- R diagram showing the database for the IPP based on the data stores shown in the figure. You do not need to includecardinalities. Bill of...
-
The detailed data flow diagram in Figure (b) decomposes the DFD for the expenditure cycle in Figure (a). Further decompose the process numbered 1.4.4, Receive Invoice, indetail. NOD Figure (b)...
-
You have decided to search the literature to try to come up with some research ideas in the area of Operations Management. How will you go about this? LO5
-
Milner Company is working on two job orders. The job cost sheets show the following. Prepare the three summary entries to record the assignment of costs to Work in Process from the data on the job...
-
You initiated a transaction to purchase a 2.875% coupon 10-year U.S. Treasury Note on Wednesday 9/13/2018. The maturity date of the note is 5/15/2026 and its yield to maturity is 2.950%. Please...
-
Janice Morgan, age 24, is single and has no dependents. She is a freelance writer. In January 2021, Janice opened her own office located at 2751 Waldham Road, Pleasant Hill, NM 88135. She called her...
-
Enviry Company, US-based company, has initiated biodegradable plastic by using agar to make packaging products to save the environment. Agar is a seaweed-based material used traditionally in Japanese...
-
Jimmy Kolop is a manager of a physical therapy department at Bentley Rehab Center. As a unit manager, Jimmy has limitations on exceeding a budget based on a particular item. Bentley Rehab center...
-
Use z scores to compare the given values. Based on sample data, newborn males have weights with a mean of 3233.5 g and a standard deviation of 933.5 g. Newborn females have weights with a mean of...
-
Glycolic acid is produced electrochemically from ethylene glycol under alkaline conditions(naoh). Hydrogen is produced at the cathode, formic acid and oxalic acid are side products Mass balance to...
-
Alves Berhad beroperasi dalam industri elektronik dan komputer. Pengurus Kewangan sedang dalam proses menyediakan penyata kewangan untuk tahun kewangan apabila dia tiba-tiba jatuh sakit. Anda telah...
-
1. First, calculate p, the probability of CHD-1 in each level of BP Status. Take advantage of the fact that the mean of a 0/1 variable is the probability or percentage of observations equaling 1. a....
-
On August 1, Jenkins Company received 527,300 for six months of rent in advance Jenkins credited Deferred Bent Revenue. If the appropriate adiusting entry is not made at the end of the year, what...
-
What is the maximum volume of 0.25 M sodium hypochlorite solution (NaOCl, laundry bleach) that can be prepared by dilution of 1.00 L of 0.80 M NaOCl?
-
a. Explain the advantages of using insurance in a risk management program. b. Explain the disadvantages of using insurance in a risk management program.
-
Why is time value of money analysis used in risk management decision making?
-
Ashley has an individual medical expense insurance policy with a $1000 calendar-year deductible and a 20 percent coinsurance clause. Ashley had outpatient surgery to remove a bunion on her foot and...
-
The impact of national context on performance management processes is poorly understood and further research is required. LO5
-
A discipline- rather than a development-focused approach to managing performance. LO5
-
Current trends in sophisticated performance management activity include greater employee ownership, emphasis on the how as well as the what, emphasis on evidence collection from both manager and...
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App