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f826_final_f03_ans - Finance 826 Final Professor Helwege...

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Finance 826 Professor Helwege Final Fall 2003 You have the entire class period to finish this exam. You may use a calculator, scrap paper, and a writing tool to complete this exam. You may hand in the scrap paper (with your name on it) to help you receive partial credit for incorrect answers. Total points=100. Part I. Answer all questions in this section to receive full credit. (80 points) (6 pts.) 1. Which of the following institutions’ bankruptcies/liquidations are likely to involve the FDIC, another government insurance scheme, or a financial crisis throughout the economy? (Put Y for yes it will involve such an entity or crisis or N for no effect.) a. An insurance company where 90% of the assets are in the general account. ___Y__ b. A defined benefit pension plan covering mainly airlines affected by September 11 and the recession. ___Y__ c. A community bank that mainly invests in mortgages. ___Y__ d. A money market mutual fund. ___N__ e. A hedge fund that does market timing via a mutual fund. ___N__ f. An auto finance company that originates loans exclusively for the ABS market. ___N__ (6 pts.) 2. Name three problems/aspects of the IPO market that Ibbotson, Ritter and Sindelar identify: a. _____underpricing____________ b. _____poor long term performance of IPO stock returns___ c. _____swings in volume (hot and cold markets)______ (4 pts) 3. You have a choice between investing $50,000 in a 10-year CD at a bank or investing the same amount in a variable life insurance policy with a term of 10 years. Which of the following features are important determinants of your decision? Circle ALL of the feature below that are important a. If the $50,000 is invested in assets with credit risk and they default, you are more likely to suffer a loss of principal with the insurance policy because the FDIC does not cover your policy and state insurance funds are usually very small. b. If the $50,000 is invested in assets that turn out to have exceedingly high returns, the variable life insurance policy will pay a much higher return than the CD because it is equivalent to a mutual fund. c. If the $50,000 is invested in assets that turn out to have exceedingly high returns, you will benefit somewhat more from having bought the insurance policy because its return is not fixed at a precise amount and will go up with the returns of the underlying assets. d. If you invest in the insurance company policy, you can avoid paying taxes on the unrealized capital gains.
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(4 pts) 4. Mutual of Omahaha, a property and casualty insuance company has written a substantial fraction of its policies on homes located in Florida. How might this company avoid going bankrupt in the event of a major hurricane? Circle ALL of the choices that are helpful. a. Issue surplus notes in advance of hurricane season. b. Raise equity through a mutual to stock conversion IPO. c. Enter a contract with a reinsurer to shift some of the risk to the reinsurer.
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