Insurance and Risk Management

151. 'Accrued interest' is:

  1. The interest on a bond, paid when it matures
  2. The interest accumulated since the last coupon date, paid by the purchaser to the seller
  3. The interest on a bond, paid every year
  4. The interest paid by the issuer of the bond
  5. 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:

  1. Issuing new policies
  2. Terminating existing policies
  3. Renewing existing policies
  4. Buying insurance from another firm
  5. 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:

  1. There is a disincentive effect for current workers
  2. The benefits are insufficient
  3. Employees are not willing to pay
  4. The dependency ratio is too high
  5. The firm may cease trading

Correct answer: (E)
The firm may cease trading

154. A 'Pay-As-You-Go' pension is one in which:

  1. Pensioners are obliged to buy an annuity
  2. Workers build up a fund of savings during their working life
  3. Pension benefits are linked to a price index
  4. Pension benefits are paid by the employer
  5. 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:

  1. Long term loans are riskier than short term loans
  2. Short-term rates are likely to fall
  3. Long-term interest rates are higher than short-term rates
  4. Nominal interest rates are higher than real rates
  5. 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:

  1. 0.5
  2. 0.23
  3. 0.36
  4. 0.16
  5. 0.1

Correct answer: (D)
0.16

157. A bank's risk:asset ratio compares its capital with its:

  1. Risk-adjusted assets
  2. Reserves
  3. Investments
  4. Loans
  5. 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:

  1. The best available information
  2. Past experience
  3. The best available model
  4. The forecasts of the person with the best forecasting record
  5. Both the 1st and 3rd answer
  6. 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):

  1. 16 and 10
  2. 10 and 6
  3. 6 and 10
  4. 16 and 6
  5. 6 and 16

Correct answer: (A)
16 and 10

160. A central bank which sets the short-term rate of interest must:

  1. Meet the resulting demand for reserves
  2. Seek government approval
  3. Change the reserve ratios
  4. Sell government bonds
  5. Buy treasury bills

Correct answer: (A)
Meet the resulting demand for reserves

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