Insurance and Risk Management

201. If market interest rates are 6%, the market price of a 7% 3-month CD for $100,000 with 60 days to maturity is:

  1. $101,750
  2. $100,757
  3. $100,505
  4. $100,254
  5. $100,596

Correct answer: (B)
$100,757

202. If market interest rates fall to 5%, the market price of the CD in question 5, when it has 40 days to maturity will be:

  1. $101,195
  2. $100,760
  3. $101,750
  4. $100,806
  5. $100,246

Correct answer: (A)
$101,195

203. If people are willing to lend at 7% when inflation is 2% and continue to lend the same amounts when inflation is 4% and interest rates have risen to 8%, they are assumed to be subject to:

  1. Myopic expectations
  2. Money illusion
  3. Risk aversion
  4. Extrapolative expectations
  5. Asymmetric information

Correct answer: (B)
Money illusion

204. If redemption yields on one year bonds are 4.5 per cent while yields on two year bonds are 5.3 per cent, this suggests that the rate on one year bonds in one year's time will be (approximately):

  1. 1.8%
  2. 6.1%
  3. 9.8%
  4. 4.9%
  5. 3.7%

Correct answer: (B)
6.1%

205. If savers decide to save more, ceteris paribus, the loanable funds theory predicts:

  1. A reduction in investment and interest rates
  2. A fall in the exchange rate
  3. A reduction in interest rates and more investment
  4. An increase in investment and interest rates
  5. Higher economic growth

Correct answer: (C)
A reduction in interest rates and more investment

206. If the current one-year rate is 5.5% while the current two-year rate is 6%, this suggests that the one year rate next year will be:

  1. 6.75%
  2. 5.75%
  3. 6.5%
  4. 6.25%
  5. 5.25%

Correct answer: (C)
6.5%

207. If the demand for money is interest-elastic, an increase in interest rates:

  1. Would have little impact on the rest of the economy
  2. Would increase the liquidity of financial assets other than money
  3. Would cause the supply of money to fall
  4. Would have a powerful impact on the rest of the economy
  5. Would have no impact on the rest of the economy

Correct answer: (A)
Would have little impact on the rest of the economy

208. If the discount rate on 3-month commercial paper is 4.9% while the yield on 3-month CDs is 5%, the real difference between them in basis points is:

  1. 1
  2. 39
  3. 10
  4. 100
  5. 3.9

Correct answer: (E)
3.9

209. If the required rate of return on a company's shares is 15 per cent, its last dividend payment was 8p and earnings are expected to continue their steady growth of 9 per cent p.a., the price of the shares (to the nearest whole p) will be:

  1. 133p
  2. 120p
  3. 53p
  4. 145p
  5. 114p

Correct answer: (D)
145p

210. If the risk free rate is 5 per cent while the market risk premium is 10 per cent, the required return on shares where the beta-coefficient is 0.8 is:

  1. 13%
  2. 8%
  3. 10%
  4. 18%
  5. 9%

Correct answer: (A)
13%

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