UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN College of Business D E PAR T M E N T O F F I NAN C E Finance 230 Fall 2007 Assignment 9 Due November 2 2007 For the first five questions refer to the following whole life policy for a 30 year old male at the time he purchased the policy Face Amount Annual Premium Dividends in year 20 first 20 years in total Cash Values end of 19th year end of 20th year Accumulated Value of Dividends at the end of 20 years at 4 5 1 7 93 3 80 3 66 3 45 3 66 23 45 B E 6 00 None of the above C 3 66 B E 2 10 None of the above C 3 28 B E 3 28 None of the above C 14 30 What is the equivalent level annual dividend per 1000 of coverage based on a 4 5 interest rate A 2 32 D 5 81 5 57 300 What is the 20 year interest adjusted net payment cost index per 1000 of coverage based on a 4 5 interest rate A D 4 189 600 200 000 What is the 20 year interest adjusted surrender cost index per 1000 of coverage based on a 4 5 interest rate A D 3 7 000 38 000 What is the 20 year traditional net cost index per 1000 of coverage A D 2 500 000 8 900 B E 3 66 None of the above C 5 73 What is the yearly rate of return for the 20th policy year if the foregone interest rate is 4 5 and the annual renewable term rate for this individual is 2 65 per 1000 A D 0 53 4 95 B E 3 66 None of the above C 4 68 6 Which of the following items in a bodily injury claim would represent punitive damages A D 7 Hedonic losses Loss of wages B B 100 000 000 Contributory negligence Last clear chance E None of the above 100 000 E None of the above C 1 000 000 You have obtained the following 20 year cost comparisons for a 1 000 000 whole life policy from insurers that all have similar very strong financial ratings using the same interest rate 5 You are concerned that the participating policies will not pay the illustrated dividends so you want to base your decision on the lowest Interest Adjusted Surrender Cost assuming no dividends are paid Based on that criterion which insurer is providing the best value Company A B C D E 10 B D Your house is located on a lake next to a factory Because the factory has been polluting the lake for 35 years you figure it would be okay for you to dump your used motor oil into the lake after changing the oil on your car Ten years later the Environmental Protection Agency sues both you and the factory for pollution to the lake An independent expert during the trial determines that the factory is 99 9 liable and you are 0 1 liable and establishes the total cleanup costs to be 100 million The court awards the EPA 100 million in this case By the time the verdict is delivered the factory has burned down the business is closed and the owners cannot be located Under joint and several liability how much are you personally liable for A 0 D 9 Hospital bills While you are walking to class you are having an emotional conversation on your cell phone You are not paying attention to where you are walking and you step into the street right in front of a car A professor who is driving under the speed limit hits you with her brand new Mercedes Although the professor could have swerved to avoid hitting you she didn t want to ruin the alignment on her tires The professor sues you for denting her car Which of the following is your best defense A Assumption of risk C Comparative negligence 8 Pain and suffering C E None of the above Type of Policy Participating Participating Participating Non participating Non participating Interest Adjusted Surrender Cost 5 78 3 45 3 87 6 50 7 20 Equivalent Level Annual Dividend 4 25 3 59 2 45 0 0 Keith Green the guest speaker on October 19 presented a slide that showed that the market tobook value for insurance companies is highly correlated with the spread How did he calculate the spread for this slide A B C D E ROE Equity Cost of Capital ROE Beta x Equity Cost of Capital ROA x Financial Leverage ROE x ROA Equity Cost of Capital None of the above
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