UNIVERSITY OF ILLINOIS AT URBANA-CHAMPAIGNCollege of BusinessD E P A R T M E N T O F F I N A N C E Finance 230 Assignment 9Fall, 2007 Due: November 2, 2007For 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 $500,000Annual Premium 8,900Dividends in year 20 7,000first 20 years in total 38,000Cash Valuesend of 19th year 189,600end of 20th year 200,000Accumulated Value of Dividends at the end of 20 years at 4.5% 57,3001. What is the 20-year traditional net cost index per $1000 of coverage?A. -7.93 B. -6.00 C. -3.66D. 3.80 E. None of the above2. What is the 20 year interest adjusted surrender cost index per $1000 of coverage based on a 4.5% interest rate?A. -3.66 B. 2.10 C. 3.28D. 3.45 E. None of the above 3. What is the 20 year interest adjusted net payment cost index per $1000 of coverage based on a 4.5% interest rate? A. -3.66 B. 3.28 C. 14.30D. 23.45 E. None of the above4. What is the equivalent level annual dividend per $1000 of coverage based on a 4.5% interest rate?A. 2.32 B. 3.66 C. 5.73D. 5.81 E. None of the above5. What is the yearly rate of return for the 20th policy year if the foregone interest rate is 4.5% and theannual renewable term rate for this individual is $2.65 per $1000?A. -0.53% B. 3.66% C. 4.68%D. 4.95% E. None of the above6. Which of the following items in a bodily injury claim would represent punitive damages?A. Hedonic losses B. Pain and suffering C. Hospital billsD. Loss of wages E. None of the above7. 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. Althoughthe 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 B. Contributory negligence C. Comparative negligence D. Last clear chance E. None of the above8. 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 B. $100,000 C. $1,000,000D. $100,000,000 E. None of the above9. 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?Type of Interest Adjusted Equivalent LevelCompany Policy Surrender Cost Annual Dividend A Participating 5.78 4.25 B Participating 3.45 3.59 C Participating 3.87 2.45 D Non-participating 6.50 0 E Non-participating 7.20 0 10. Keith Green, the guest speaker on October 19, presented a slide that showed that the market-to-book value for insurance companies is highly correlated with the spread. How did he calculate the spread for this slide?A. ROE – Equity Cost of CapitalB. ROE – (Beta x Equity Cost of Capital)C. ROA x Financial LeverageD. ROE x ROA – Equity Cost of CapitalE. None of the
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