Finance 336 - Finance 336 Homework 5 Part I 4 a PMT=\$20,000 I=6 N=15 PV=-194,245 b PMT=\$20,000 I=6 N=20 PV=-229,398 c PV=-289,774.16 PV=-381,647.12 5

# Finance 336 - Finance 336 Homework 5 Part I 4 a PMT=\$20,000...

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Finance 336 Homework # 5 Part I 4. a) PMT=\$20,000 I=6 N=15 PV=-194,245 b) PMT=\$20,000 I=6 N=20 PV=?-229,398 c) PV=-289,774.16 PV=-381,647.12 5. a)No, because the combined ratio is 73% + 12.5% + 18% = 103.5 b) Yes, because the combined ratio adjusted for investment yield is 103.5% - 8% = 95.5%. 6. Combined ratio = 77.5% + 12.9% + 16.0% = 106.40%. In order to be profitable, the yields on investments have to be greater than 6.40%. 7. Pure loss = \$3.6 million - \$1.96 million = \$1.64 million Expenses = 0.066 x \$3,600,000 = \$237,600 Dividends = 0.012 x \$3,600,000 = \$43,200 Investment returns = \$170,000 Net profits = 1,640,000-237,600-43,200+170,000 = \$1,529,200 8. Loss ratio=\$4,343,750/\$6,250,000=69.5% Expense ratio=\$1,593,750/\$6,250,000=25.5% Dividend ratio=\$156,250/6,250,000=2.5% Combined ratio=69.5%+25.5%+2.5%=97.5% Investment ratio=\$218,750/\$6,250,000=3.5% Operating ratio=97.5%-3.5%=94.0% Overall profitability=100.0%-94.0%=6% Part II In the midst of the financial crisis, AIG was struggling to keep afloat and was controversially bailed out by the government. Some key points to keep in mind pertaining to AIG include the fact that insurance policy holders at AIG were protected by reserves that all of the insurance companies are required to hold by state government. Also, the unregulated use of credit default swaps and

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• Summer '19
• Finance, Financial services, Federal Reserve System, AIG