Insurance and Risk Management
151. 'Accrued interest' is:
- The interest on a bond, paid when it matures
- The interest accumulated since the last coupon date, paid by the purchaser to the seller
- The interest on a bond, paid every year
- The interest paid by the issuer of the bond
- The interest accumulated since the last coupon date, paid by the seller of the bond to the purchaser
Correct answer: (B)
The interest accumulated since the last coupon date, paid by the purchaser to the seller
152. 'Reinsurance' refers to the practice by insurance companies of:
- Issuing new policies
- Terminating existing policies
- Renewing existing policies
- Buying insurance from another firm
- Insuring the same risk twice
Correct answer: (D)
Buying insurance from another firm
153. A 'pay as you go' pension system is unsuitable for a private firm because:
- There is a disincentive effect for current workers
- The benefits are insufficient
- Employees are not willing to pay
- The dependency ratio is too high
- The firm may cease trading
Correct answer: (E)
The firm may cease trading
154. A 'Pay-As-You-Go' pension is one in which:
- Pensioners are obliged to buy an annuity
- Workers build up a fund of savings during their working life
- Pension benefits are linked to a price index
- Pension benefits are paid by the employer
- Pension benefits are paid from the contributions of those in work
Correct answer: (E)
Pension benefits are paid from the contributions of those in work
155. A 'positive term premium' means:
- Long term loans are riskier than short term loans
- Short-term rates are likely to fall
- Long-term interest rates are higher than short-term rates
- Nominal interest rates are higher than real rates
- Borrowers prefer to borrow for long periods
Correct answer: (C)
Long-term interest rates are higher than short-term rates
156. A bank with cash of 5, deposits at the central bank of 3, investments of 20, advances of 22 and customer deposits of 50 has a reserve ratio of:
- 0.5
- 0.23
- 0.36
- 0.16
- 0.1
157. A bank's risk:asset ratio compares its capital with its:
- Risk-adjusted assets
- Reserves
- Investments
- Loans
- Risk-adjusted liabilities
Correct answer: (A)
Risk-adjusted assets
158. A belief that expectations were exogenous could lead one to the view that judgements about the future were likely to be based on:
- The best available information
- Past experience
- The best available model
- The forecasts of the person with the best forecasting record
- Both the 1st and 3rd answer
- Both the 1st and 2nd answer
Correct answer: (B)
Past experience
159. A bond issued in July 1997 will mature in July 2013 for £100. In July 2003, its original maturity and residual maturity would be (respectively):
- 16 and 10
- 10 and 6
- 6 and 10
- 16 and 6
- 6 and 16
Correct answer: (A)
16 and 10
160. A central bank which sets the short-term rate of interest must:
- Meet the resulting demand for reserves
- Seek government approval
- Change the reserve ratios
- Sell government bonds
- Buy treasury bills
Correct answer: (A)
Meet the resulting demand for reserves