Insurance and Risk Management

171. A treasury bill which matures in 62 days for £250,000 is currently trading at 248,000. The rate of discount on this bill is:

  1. 4.74%
  2. 8%
  3. 0.806%
  4. 0.8%
  5. 4.7%

Correct answer: (E)
4.7%

172. A unit trust fund is established with assets of £200m divided into 150m units. The value of the underlying assets rises to £250m. The value of each unit is:

  1. £1.66
  2. £0.80
  3. £1.25
  4. £1.33
  5. £0.60

Correct answer: (A)
£1.66

173. According to the Fisher hypothesis, the nominal rate of interest consists of:

  1. A stable real rate plus a variable liquidity premium
  2. A stable real rate plus a variable inflation premium
  3. A stable real rate plus a variable risk premium
  4. An inflation premium plus a liquidity premium
  5. A real rate plus a liquidity premium plus a risk premium

Correct answer: (B)
A stable real rate plus a variable inflation premium

174. According to the liquidity preference theory of interest, an increase in uncertainty, other things being equal, will:

  1. Reduce the demand for money
  2. Decrease output and employment
  3. Raise interest rates
  4. Reduce the supply of money
  5. Increase risk aversion

Correct answer: (C)
Raise interest rates

175. According to the policy irrelevance theorem, why is policy irrelevant?

  1. Because no one is interested in it
  2. Because it has no effect at all
  3. Because it can't influence real variables
  4. Because governments seldom know what is going to happen next
  5. Because it can't influence inflation

Correct answer: (C)
Because it can't influence real variables

176. According to the rational expectations hypothesis:

  1. People do not make mistakes in forecasting inflation
  2. People make only small mistakes in forecasting inflation
  3. People do not make random mistakes in forecasting inflation
  4. People do not make avoidable mistakes in forecasting inflation
  5. Some people do not make mistakes in forecasting inflation

Correct answer: (D)
People do not make avoidable mistakes in forecasting inflation

177. All demand for money functions that are tested are macroeconomic relationships between the aggregate demand for money and other economic variables because:

  1. Microeconomic relationships are less interesting
  2. The purpose of studying the demand for money is to help in understanding the effect of monetary policy
  3. Microeconomic relationships are unpredictable
  4. Macroeconomic relationships are always more stable than microeconomic relationships

Correct answer: (B)
The purpose of studying the demand for money is to help in understanding the effect of monetary policy

178. An 'open-end' investment fund is one which:

  1. Allows anyone to invest in it
  2. Publishes its asset portfolio regularly
  3. Can invest in any type of asset that it chooses
  4. Allows investors to withdraw funds on demand
  5. Varies in size with inflows and outflows of funds

Correct answer: (E)
Varies in size with inflows and outflows of funds

179. An 'overdraft' economy is one in which:

  1. All firms have an overdraft
  2. Financial markets play no role in borrowing and lending
  3. Firms rely on internal funds
  4. Borrowing and lending take place largely through intermediaries

Correct answer: (D)
Borrowing and lending take place largely through intermediaries

180. An airline expands its fleet of planes just before a serious accident reduces the demand for its flights. This is an example of:

  1. Specific risk
  2. Income risk
  3. Systematic risk
  4. Market risk
  5. Capital risk

Correct answer: (A)
Specific risk

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