CPCU 540

Fred expects to retire in four years. He will need $125,000 at retirement to pay off his mortgage. If an investment pays 10 percent compounded annually, how much must Fred deposit at the end of each of the next four years so he can pay off the mortgage? Select one: A. $25,895 B. $26,934 C. $28,125 D. $31,250

$26,934Correct. In order for Fred to pay off the mortgage, he must deposit $26,934 at the end of each of the next four years. Using the FVA formula and FVA Table: $125,000=Annuity X 4.6410 or $125,000/4.6410=$26,934.

authorized reinsurer

A reinsurer that is authorized to do business in the primary insurer's state of domicile

surplus note

A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders' surplus rather than as a liability on the insurer's statutory balance sheet.

Joe wants to have $40,000 available to make the down payment on a house three years from now and has decided to set aside part of an inheritance he just received to achieve that goal. If Joe can earn 5% interest on a bank certificate of deposit, how much of the must he set aside today in order to have $40,000 three years from now? Select one: A. $34,554 B. $34,000 C. $33,888 D. $35,212

A. $34,554 Correct. PV = $40,000 ÷ (1 + .05)3; $40,000 ÷ 1.1576 = $34,554; Joe must set aside $34,554 today to have $40,000 three years from now.

A bond purchased for $43,000 on April 1, 20X1 was sold on March 31, 20X2 for $42,000. The bond paid interest of $3,000 during the year it was owned. Given this information, what annual rate of return did the bond owner earn during the period? Select one: A. 4.7% B. 4.9% C. 5.1% D. 5.3%

A. 4.7% Correct. ARR for a bond = (interest+capital gains)÷bond price at beginning of year. Calculate capital gain (loss): $43,000 - $43,000 = -$1,000. ($3,000 + -$1,000)÷$43,000 = .047 (4.7%)

Braxton Insurance Company recorded an underwriting loss of $4 million last year. Braxton has loss and loss expense reserves of $30 million and an unearned premium reserve of $10 million. Assuming Braxton faces a 30 percent tax rate, what is Braxton's cost of funds from insurance operations? Select one: A. 7 percent B. 9 percent C. 10 percent D. 13 percent

A. 7 percent [(1-.30) x 4,000,000] ÷ (30,000,000 + 10,000,000) = .07

Based on fundamental analysis, which one of the following is most likely to have a negative effect on the price of a stock? Select one: A. A decrease in institutional ownership B. A decrease in perceived risk C. An increase in dividend payouts D. An increase in interest rates

A. A decrease in institutional ownership

Company A is in process of taking over ownership of Company B. The takeover is facilitated by obtaining the voting rights of Company B's shareholders. This strategy for achieving a takeover is known as Select one: A. A proxy contest. B. An acquisition. C. A friendly takeover. D. A consolidation.

A. A proxy contest.

When an insurer has a properly diversified investment portfolio, the insurer can expect Select one: A. A reduced risk for the given level of return. B. A higher return from the increase in the risk. C. The investment risk to be eliminated. D. The return to be lower due to the increased risk.

A. A reduced risk for the given level of return.

How can a reduction in the value of an organization's goodwill improve cash flow? Select one: A. A tax reduction increases net earnings. B. Less inventory is purchased. C. Reductions are canceled out on the income statement. D. A higher percentage of assets are in quantitative measures.

A. A tax reduction increases net earnings.

Excessive due diligence may Select one: A. Damage the relationship between the buyer and the target. B. Increase legal risk exposures. C. Produce an excessive valuation of the target. D. Fail to expose the extent of the risk.

A. Damage the relationship between the buyer and the target.

For purposes of an insurer's income statement, incurred losses are Select one: A. Expenses. B. Capital losses. C. Paid losses. D. Paid claims.

A. Expenses.

Anticipation of which one of the following by investors would tend to increase stock prices? Select one: A. Higher earnings B. Higher risk C. Higher interest rates D. Lower dividend payouts

A. Higher earnings

When accountants are able to ignore generally accepted accounting principles when recording some insignificant items, they are following the A. Conservatism principle. B. Materiality principle. C. Cost principle. D. Matching principle.

. Materiality principle.

When underwriting business interruption loss exposures, it is important to have a clear picture of the organization's operating history. Underwriters can gain this understanding through the use of Select one: A. Multiple period vertical analyses. B. Ratio analysis. C. Trend analysis. D. Single period vertical analysis.

. Multiple period vertical analyses.

An investment has an initial cash outflow of $30,000 and a return of $0 at the end of the first year and $40,000 at the end of the second year. The required rate of return is 12%. What is the net present value of this investment? Disregard the effect of depreciation and taxes. Select one: A. $1,888 B. $5,716 C. $20,176 D. $37,604

1,888 $40,000 x present value of a dollar to be received after two years at 12%, or $40,000 x .7972 = $31,888, minus the initial investment of $30,000, or $1,888

The most recent financial statements for Buddy's Burger Hut reveal the following: Cash$50,000 Equipment$25,000 Inventory$15,000 Accounts Receivable$2,500 Cost of Goods Sold$125,000 Marketable Securities$5,000 Current Liabilities$50,000 Based on this information, Buddy's Burger Hut's Acid-Test Ratio is Select one: A. 0.46. B. 0.56. C. 1.15 D. 1.45.

1.15. ($50,000 + $5,000 + $2,500) / $50,000 = 1.15

Which one of the following combined ratios mean that losses and expenses have exceeded premium income? Select one: A. 5% B. 95% C. 100% D. 105%

105%

Lisa wants to quantify her company's sales growth rate over the past year. Using the following data, what is the growth rate? End Yr. 2End Yr. 1 Net Sales$500,300$450,200 Select one: A. 8 percent. B. 9 percent. C. 10 percent. D. 11 percent.

11 %

Jason's financial advisor recommends investing in a preferred stock that pays a $12.00 annual dividend. Jason can earn 8 percent in a similar investment. What is the present value of the preferred stock? Select one: A. $ 80 B. $ 96 C. $120 D. $150

150 12/.08

In the NAIC's Change in Net Premiums Written ratio, what is the threshold for an acceptable increase or decrease? Select one: A. 10 percent B. 25 percent C. 33 percent D. 100 percent

33 percent

During 20X2, IBX Corporation stock experienced a price gain from $25.50 to $32.35, and investors also received a $2.75 dividend payment. What was the annual rate of return for this stock during 20X2? Select one: A. 26.9% B. 29.7% C. 33.3% D. 37.6%

37.6% Calculate capital gain: $32.35 - $25.50 = $6.85. ($6.85+$2.75)÷$25.50 = .376 (37.6%)

Sarah can invest $20,000 in an account that will be worth $23,434 in four years. What is the expected annual rate of return for this investment? Select one: A. 2.34% B. 3.00% C. 3.84% D. 4.00%

4% (1+r)^n = future value / present value

Which one of the following statements is true? Select one: A. If a nonfinancial company has a debt-to-equity ratio greater than 100 percent, it indicates that the company is financed mostly by debt. B. A nonfinancial company with a low debt-to-equity ratio is considered to be highly leveraged. C. As profits increase, the amount of debt repayments decreases. D. Interest payments on debt are payable after profits have been returned to the company's owners.

A. If a nonfinancial company has a debt-to-equity ratio greater than 100 percent, it indicates that the company is financed mostly by debt.

Financial managers, who want to increase the market price for their companies' stock, as well as send a signal to investors, will Select one: A. Increase dividend payments. B. Invest earnings in projects. C. Sell more stock. D. Sell more bonds.

A. Increase dividend payments.

Why are qualitative assets of an organization, such as management and productivity, so hard to quantify? Select one: A. It is extremely difficult to measure these qualitative assets. B. They are not permitted on the balance sheet. C. These assets have no market value. D. Such assets are not considered by investors.

A. It is extremely difficult to measure these qualitative assets.

Which one of the following statements about trend analysis of a company's financial data is true? Select one: A. It is more likely to focus on income statement items than on balance sheet items. B. It requires at least five years of data. C. It eliminates the need to calculate financial ratios. D. It requires comparing each year's data to a specific base year's data.

A. It is more likely to focus on income statement items than on balance sheet items.

Economic capital is defined as Select one: A. The amount of capital a firm needs to remain solvent at a given risk tolerance level. B. The market value of a firm's total assets less the market value of the firm's total liabilities. C. The minimum level of capital a firm will need at any point in time to generate the minimum rate of return required by the suppliers of capital. D. The economic value of the firm if all of the risky assets were converted into their equivalent risk-free value.

A. The amount of capital a firm needs to remain solvent at a given risk tolerance level.

Bob's Manufacturing has been in business for one year. Which one of the following is true regarding Bob's year-end financial statements? Select one: A. The beginning balance on the statement of changes in shareholders' equity will show as $0. B. Cash on the balance sheet will be shown as $0. C. Change in cash on the statement of cash flow will be $0. D. The fact that there are no prior year reports will have no impact on the financial statements.

A. The beginning balance on the statement of changes in shareholders' equity will show as $0.

Which one of the following statements about the factors affecting a company's dividend policy is true? Select one: A. The cost of securing external sources of capital in order to pay dividends needs to be weighed against higher stock prices that result from the dividend payment. B. Retention of earnings by a company with the prospect of higher dividends later is less risky to shareholders than the payment of dividends currently. C. Increasing cash dividends are generally a negative sign about an insurer's future and lead to lower share prices. D. Shareholder taxation of dividends is deferred until they sell stock.

A. The cost of securing external sources of capital in order to pay dividends needs to be weighed against higher stock prices that result from the dividend payment.

Which one of the following statements is true? Select one: A. The insurer's liquidity position is satisfactory if the combined value of its high-grade marketable securities and cash exceeds its unearned premium reserve and loss reserve. B. The insurer's liquidity position is unsatisfactory if underwriting operations are continually contributing to their cash balance. C. The insurer's liquidity position is unsatisfactory if loss and loss adjustment expense payments are less than cash inflows created by underwriting and investment operations. D. The insurer's liquidity position is satisfactory if assets must be sold at a price below market value.

A. The insurer's liquidity position is satisfactory if the combined value of its high-grade marketable securities and cash exceeds its unearned premium reserve and loss reserve.

In evaluating underwriting profitability, the analyst usually compares losses and loss adjustment expense amounts to Select one: A. The portion of written premiums that corresponds to the coverage that has already been provided. B. The total premium on all policies written during a particular period. C. The relation of an insurer's net written premiums to its policyholders' surplus. D. The expenses incurred up front at the time associated premiums are written.

A. The portion of written premiums that corresponds to the coverage that has already been provided.

When reviewing a rating unit's operating performance, which one of the following ratios indicates whether an insurer has made an underwriting loss or gain? Select one: A. Loss ratio B. Combined ratio C. Expense ratio D. Adequacy ratio

B. Combined ratio

einvestment risk is the uncertainty about the rate at which periodic interest payments can be reinvested over the life of an investment. When the duration of the underwriting and investment portfolios are matched the portfolio is said to be Select one: A. Matched with investment maturity values. B. Immunized against changes in interest rates. C. At risk for changes in the balance of the portfolio. D. At the highest expected rate of return.

B. Immunized against changes in interest rates.

The NAIC Own Risk and Solvency Assessment (ORSA) does all of the following, EXCEPT: Select one: A. Promotes enterprise risk management (ERM) principles B. Imposes rigid structure C. Challenges insurers to prospectively determine capital adequacy D. Advocates financial soundness

B. Imposes rigid structure

Risky Insurance Company has a risk-based capital (RBC) level of 100 percent of the authorized control level. At this level, the regulator Select one: A. Will perform an examination of Risky Insurance Company. B. May place Risky Insurance Company under regulatory control. C. Is required to place Risky Insurance Company under regulatory control. D. Will require Risky Insurance Company to file a comprehensive plan.

B. May place Risky Insurance Company under regulatory control.

hich one of the following is most likely to involve long-tail losses? Select one: A. Small property claims B. Medical malpractice claims C. Long-term debt D. Unearned premium reserves

B. Medical malpractice claims

Common-size financial statements are particularly useful when analyzing Select one: A. Performance of two companies of the same size. B. Performance of two or more companies. C. Performance of a company over two or more periods. D. Performance between two divisions of a company.

B. Performance of two or more companies.

The investors in an insurer have the expectation that their investment will grow. The investor's return is often measured by Select one: A. Total insurance written. B. Return on equity (ROE). C. Total asset size. D. Risk-based capital (RBC).

B. Return on equity (ROE).

Virtually all assets involve some amount of asset risk. Which one of the following is true of the risk-based capital (RBC) formula in regard to asset risk? Select one: A. Reinsurer's failure to pay amounts due would be an asset risk. B. Riskier assets require more underlying capital than less risky assets C. Excessive growth in premiums written would pose an asset risk. D. An increase in asset value will reduce policyholder surplus.

B. Riskier assets require more underlying capital than less risky assets

The Capital Asset Pricing Model is a method of pricing securities based on Select one: A. Insurance underwriting risk and expense control. B. The relationship between risk and return. C. The mixture of risk-aversion and risk-seeking behavior of individual investors. D. Expected returns on domestic investments and expected returns on international investments.

B. The relationship between risk and return.

What has constituted the highest percentage of admitted assets for property-casualty insurers in the U.S. in recent years? Select one: A. Stocks B. Loss and loss expense reserves C. Bonds D. Real estate

Bonds

Which one of the following represents the largest class of assets owned by property-casualty insurers? Select one: A. Stocks B. Bonds C. Cash D. Cash equivalents

Bonds

Laura borrowed $10,000 as a student loan on September 1, 2008. She will graduate on September 1, 2012. Interest begins accruing on the loan immediately; however, Laura does not have to make any payments until graduation. The interest rate is eight percent, compounded semi-annually. What is the total amount Laura will owe for this loan on September 1, 2012? Select one: A. $13,459 B. $13,605 C. $13,686 D. $13,728

C. $13,686

Robert has borrowed $5,000 for six months at an interest rate of six percent simple interest per year. At the end of six months, the amount Bob needs to pay off the loan plus interest is Select one: A. $5,000. B. $5,050. C. $5,150. D. $5,300.

C. $5,150. Correct. FV = PV x (1+r). Divide the annual interest rate in half for a six-month loan. FV = $5,000 x 1.03 = $5,150. At the end of six months, the amount Bob needs to pay off the loan plus interest is $5,150.

In addition to the effect of interest rate changes and yields to maturity, an investor must consider the actual and the real rate of return on an investment in bonds. Which one of the following is the factor that impacts the actual rate of return to provide a real rate of return? Select one: A. Term structure B. Yield spread C. Inflation D. Bond price

C. Inflation

Market conditions have caused a downward fluctuation in the value of an insurer's equity investment. This loss will be included at fair value in the insurer's Select one: A. Net investment income. B. Accounting income. C. Net income. D. Surplus relief.

C. Net income.

A system developed by the National Association of Insurance Commissioners (NAIC) to determine the minimum amount of capital an insurer needs to support its operations, given the insurer's risk characteristics, defines the Select one: A. Insurance Regulatory Information System (IRIS). B. National Association of Insurance Commissioners (NAIC) system. C. Risk-based capital (RBC) system. D. Minimum capital requirements (MCR) system.

C. Risk-based capital (RBC) system.

Which one of the following statements about Eurobonds is true? Select one: A. They are offered and issued outside the issuer's country of origin. B. They are usually secured. C. They typically have maturities of twenty to thirty years. D. They are required to be denominated in Euros.

A. They are offered and issued outside the issuer's country of origin.

Which one of the following is an advantage of being a company common stockholder over a preferred stockholder? Select one: A. They exercise control over management. B. They receive larger company dividends. C. They are paid first in the case of bankruptcy. D. They receive a fixed dividend that is paid first.

A. They exercise control over management.

Which of the following best describes the purpose of financial statements? Select one: A. To communicate information about an organization's financial status. B. To interrelate the balance sheet, income statements, and owners equity. C. To present financial information to the accounting department for bookkeeping. D. The classification, analysis, and determination of appropriate reporting.

A. To communicate information about an organization's financial status.

Certified reinsurer

An unauthorized reinsurer that meets certain qualifications and is approved by the state insurance regulator of the ceding company's state of domicile.

Moon Company's computer system must be replaced in five years at a cost of $80,000. The owners have placed $60,000 in an investment that pays 4 percent compounded semi-annually and matures in five years. When this investment matures, how much additional money, if any, will Moon Company need to replace the computer system? Select one: A. $ 0 B. $ 6,860 C. $ 6,998 D. $ 8,000

B. $ 6,860 FV = PV x (1+r)n. Use the FV factor from the table 2% over 10 periods to account for the semi-annual compounding. $60,000 x 1.2190 = $73,140. Subtract this from the $80,000 replacement cost. Additional money required is $6,860

Frank can deposit $1,000 in Diamond Bank and earn two percent simple interest for the first year. If Frank keeps the initial investment plus interest in the account for an additional 12 months, the account will earn 6 percent simple interest for this second year. At the end of the second year, rounded to the nearest dollar, the account value will be Select one: A. $1,070 B. $1,081 C. $1,103 D. $1,124

B. $1,081 Correct. FV over multiple periods = PV x (1+r) x (1+r). $1,000 x (1.02) x (1.06) = $1,081. At the end of the second year, the account value will be $1,081.

Craig estimates that the payoff on his auto loan will be $6,000 at the end of four years. If Craig can earn 10 percent interest compounded semi-annually, how much must Craig invest today to be able to pay off the $6,000 loan at the end of four years? Select one: A. $4,023 B. $4,061 C. $4,098 D. $4,124

B. $4,061Correct. Use the formula PV = FV ÷ (1+r)n, dividing r by the number of compounding periods per year, and multiplying n by the number of compounding periods per year. $6,000 ÷ (1+.05)8 = $4,061 today. Alternatively, use the factor from the FV table at 5% over 8 periods.

At year-end last year, Conservative Casualty Insurance Company had total assets of $360 million and total liabilities of $310 million. The company's net underwriting income last year was $5 million and net investment income was $3 million. Based on the accounting equation, what was Conservative Casualty's policyholders' surplus at the end of last year? Select one: A. $42 million B. $50 million C. $58 million D. $670 million

B. $50 million

U.S. Treasury bonds to have relatively low yields to maturity relative to corporate bonds. Which one of the following explanations for this difference is most accurate? Select one: A. Treasury bonds have relatively longer maturities than corporate bonds. B. Treasury bonds have higher coupon rates than corporate bonds. C. Treasury bonds have no credit risk. D. Treasury bonds have little or no collateral to back the financial obligations.

C. Treasury bonds have no credit risk.

All of a firm's risks are considered together to estimate the probability that the market value of the firm's liabilities will exceed that of its assets by various amounts over a one-year period. This probability measure is based on a concept called Select one: A. Amortized cost. B. Chaos theory. C. Value at risk. D. Ruin theory.

C. Value at risk.

Which one of these GAAP concepts requires an organization's assets to be recorded at their purchase price or production price? Accrual versus cash basis accounting Cost principle Matching principle Revenue recognition principle

Cost principle

Which one of the following phases of the big data revolution relies on methods such as machine learning and data modeling? Select one: A. Data capture B. Data sharing C. Data storage D. Data analytics

D. Data analytics

Fair value accounting uses the term market value surplus (MVS) for an organization's net worth. Which one of the following is the term used for an insurer's net worth under statutory accounting principles (SAP)? Select one: A. Economic capital B. Owners' equity C. Profit margin D. Policyholders' surplus

D. Policyholders' surplus

Which one of the following is most likely to involve short-tail losses? Select one: A. Long-term debt B. Unearned premium reserves C. Medical malpractice claims D. Property claims

D. Property claims

For a primary insurer, one of the main benefits of purchasing an excess of loss reinsurance treaty is that it can Select one: A. Withdraw from a segment of business. B. Transform insurable risk into investment risk. C. Cover all of its policy acquisition costs. D. Reduce the amount of capital the insurer must have on hand.

D. Reduce the amount of capital the insurer must have on hand.

Which one of the following statements about zero-coupon bonds is true? Select one: A. They are redeemable at less than par upon maturity. B. They make the problem of interest reinvestment more complicated. C. They typically have a coupon rate that adjusts with the rate of inflation. D. They typically sell at a deep discount.

D. They typically sell at a deep discount.

How would an underwriter best use a potential insured's financial statements when underwriting the risk? Select one: A. To determine how much actual premium the risk can pay B. To determine if there is any potential growth for this risk C. To determine if the risk is committing any fraud in their operations D. To assess the ability of the risk to make timely premium payments

D. To assess the ability of the risk to make timely premium payments

All of the following are common profitability measures used in ratio analysis, EXCEPT: Select one: A. Net profit margin B. Return on assets C. Return on equity D. Turnover of assets

D. Turnover of assets

Which one of these is an insurtech-related category that includes firms that offer insurance to economically disadvantaged people? Crowdfunding Microinsurance On-demand insurance Peer-to-peer insurance

Microinsurance

statement of cash flows

The financial statement that summarizes the cash effects of an organization's operating, investing, and financing activities during a specific period.

fair value

The market value, either actual or estimated, of an asset or a liability

After bonds, what is the second largest category of admitted assets in the property-casualty insurance industry? Select one: A. Equipment B. Premiums receivable C. Real Estate D. Stocks

Stocks

gross profit

net sales - cost of goods sold

Although trend analysis can be applied to the balance sheet to quantify changes in assets or liabilities over time, it is usually applied to the income statement to quantify changes in a company's revenues and expenses over time. An analyst focuses on the major components of the income statement, which can include Cash. Accounts receivable. Operating expenses. Long-term debt.

operating expenses

common size statement

A financial statement in which amounts are reported as a percentage of a base figure.

Capital budgeting manages a corporation's Select one: A. Insurance purchases. B. Cash inflows. C. Long-term investments. D. Accounts receivable.

C. Long-term investments.

All of these are examples of annuities due, EXCEPT: Lease agreements Mortgage payments Lottery payouts Retirement plan payouts

Mortgage payments

The annual rate of return for a bond is equal to: The bond's coupon rate. The bond's change in market value. The sum of the bond's coupon rate plus the bond's change in market value. The sum of the bond's interest payments plus the bond's change in market value for the year divided by the value of the bond at the beginning of the year.

The sum of the bond's interest payments plus the bond's change in market value for the year divided by the value of the bond at the beginning of the year.

A start-up company, New Corporation, issued 10,000 shares of stock with a par value of $15 a share at $20 a share. What is the amount of New's paid-in capital? Select one: A. $10,000 B. $50,000 C. $150,000 D. $200,000

$200,000. Paid-in capital represents the total amount invested in an organization by the owners and consists of the par value of the stock issued (here, $150,000) plus any additional paid-in capital over the par value (here, $50,000).

Working capital management focuses on a corporation's short term needs for cash and other resources. The working capital of a corporation can be best defined by which one of the following? Select one: A. Retained earnings minus liabilities B. Current assets minus current liabilities C. Net income minus operating expenses D. Policyholder's surplus minus liabilities

. Current assets minus current liabilities

International Financial Reporting Standards (IFRS) report the value of property, plant, and equipment assets at Select one: A. Book value. B. Fair value. C. Amortized cost. D. Historical cost.

. Fair value.

Which one of the following is a true of an organization's balance sheet? Select one: A. It reports the inflow of assets to the organization. B. It compares revenues to expenses for the period. C. It is illustrated by the accounting equation. D. It is the result of revenue over a period of time.

. It is illustrated by the accounting equation.

The ability to meet day-to-day financial obligations relies on Select one: A. Adequate working capital. B. The minimization of current liabilities. C. The mix of debt and equity. D. Adequate current assets.

Adequate working capital

recievables

An asset classification that consists of the amounts owed to a company by customers and other outsiders.

marketable securities

An asset classification that includes temporary investments that can easily be converted into cash.

operating income

An income statement value that reflects income that results from the normal operations of the business during the period covered by the statement; calculated as the gross profit less selling, general, and administrative expenses.

A corporate finance department usually performs all the following functions, EXCEPT: Capital budgeting Auditing Capital structure Working capital management

Auditing

Assets on the balance sheet are classified as current and noncurrent. Which one of the following is classified as a noncurrent asset? Select one: A. A $10,000 corporate bond that matures in 15 months B. A copyright that expires in 10 months C. Inventory for sale that was purchased one year ago D. Marketable securities purchased 15 months ago

B. A copyright that expires in 10 months

John is a risk management specialist for XYZ Company. John examines XYZ's financial statements on a quarterly basis. Which one of the following best describes a reason for this analysis? Select one: A. A review of the financial statements helps John to determine XYZ's ability to pay upcoming insurance premiums. B. A review of the financial statements helps John to determine XYZ's insurance needs. C. A review of the financial statements helps John to assess XYZ's compliance with loan covenants. D. A review of the financial statements helps John to evaluate XYZ's ability to finance premiums.

B. A review of the financial statements helps John to determine XYZ's insurance needs.

Which one of the following describes a section of the statement of cash flows? Select one: A. Cash flows from agency activities B. Cash flows from investing activities C. Cash flows from premium activities D. Cash flows from net income activities

B. Cash flows from investing activities

Cost of goods sold appears on the income statements of manufacturing and retail entities. Which one of the following statements best describes cost of goods sold? Select one: A. Cost of goods sold expenses inventory evenly throughout the year. B. Cost of goods sold reports expenses after an inventory item is sold. C. Cost of goods sold calculation adds ending inventory and subtracts beginning inventory from purchases. D. Cost of goods sold is equal to a percentage of purchases made by the entity during the year.

B. Cost of goods sold reports expenses after an inventory item is sold.

Which one of the following statements is true? Select one: A. An insurer's capacity is unaffected by underwriting gains and losses. B. Fair value leads to values that are consistent with economic income. C. An insurer's capacity is unaffected by investment results. D. Generally accepted accounting principles (GAAP) require insurers to carry common stock on the balance sheet at market value.

B. Fair value leads to values that are consistent with economic income.

Reporting comprehensive income is especially important for insurance companies because Select one: A. Insurers may have large realized investment losses. B. Insurers may have large unrealized investment gains. C. Insurers may have large recoverable due from reinsurers. D. Insurers may have large deferred policy acquisition costs.

B. Insurers may have large unrealized investment gains.

Which one of the following groups of financial statements, when considered together, would best present an organization's financial condition? Select one: A. The balance sheet and the statement of cash flow. B. The balance sheet, the income statement, the statement of changes in shareholders' equity, and the statement of cash flow.n C. The income statement and the statement of owners' equity. D. The balance sheet, the income statement, and the statement of cash flow.

B. The balance sheet, the income statement, the statement of changes in shareholders' equity, and the statement of cash flow.n

Which one of the following would be the best reason for maximization of shareholder wealth as a goal of corporate finance? Select one: A. To assist in meeting regulatory requirements.Incorrect. It would be to maintain a market to raise additional capital. B. To maintain a market to raise additional capital. C. To maintain the integrity of the corporate identity. D. To retain customers in a competitive marketplace.

B. To maintain a market to raise additional capital.

The two principal insurer liabilities that arise from the sale of insurance policies are loss reserves and Select one: A. Long-term debt. B. Unearned premium reserves. C. Accounts payable. D. Notes payable.

B. Unearned premium reserves.

Liabilities are claims against the organization's assets. Which one of the following best describes a current liability? Select one: A. Unamortized portion of goodwill B. Unpaid invoices from vendors. C. Treasury stock to be retired in six months D. Deferred acquisition costs

B. Unpaid invoices from vendors.

An insurer's comprehensive income includes Select one: A. Listings of salaries of key employees. B. Unrealized gains and losses on securities C. Any dividends paid to stockholders. D. The insurer's completed balance sheet.

B. Unrealized gains and losses on securities

The Financial Accounting Standards Board (FASB) requires organizations to report comprehensive income. Comprehensive income includes an organization's net income and Select one: A. Additional capital contributions made by shareholders. B. Unrealized gains on securities available for sale. C. Write-down of goodwill due to impairment. D. Change in market value of stock issued by the organization.

B. Unrealized gains on securities available for sale.

Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance. The underwriter requested a copy of Home Houseware's most recent financial statements. The underwriter will use the balance sheet to determine Select one: A. Home Houseware's gross profit margin as of the balance sheet date. B. Home Houseware's sources of cash as of the balance sheet date. C. Home Houseware's financial position as of the balance sheet date. D. Dividend payments to shareholders as of the balance sheet date.

C. Home Houseware's financial position as of the balance sheet date.

Which one of the following is an example of a noncurrent liability? Select one: A. Short-term debt B. Accounts payable C. Long-term notes payable D. Unearned revenue

C. Long-term notes payable

Accounting activities include Select one: A. Providing access to financial markets. B. Managing an organization's intangible assets. C. Managing an organization's capital. D. Accumulating and reporting financial data.

D. Accumulating and reporting financial data.

A primary source of revenue for insurers is premiums earned. Another major source of revenue is Select one: A. Recoverables from reinsurers. B. Amortized premium on bond investments. C. Subrogation proceeds. D. Coupon payments on fixed income securities.

D. Coupon payments on fixed income securities.

The Sarbanes-Oxley Act of 2002 Select one: A. Requires principal officers to guarantee completeness and accuracy of financial reports.Incorrect. The Sarbanes-Oxley Act of 2002 created a board to regulate public accounting firms that audit publicly traded corporations. B. Enhanced financial disclosure requirements for all corporations issuing stocks. C. Subjects officers to civil penalties for failing to fulfill requirements. D. Created a board to regulate public accounting firms that audit publicly traded corporations.

D. Created a board to regulate public accounting firms that audit publicly traded corporations.

The generally accepted accounting principles (GAAP) matching principle Select one: A. Allows businesses to compare the income statement and balance sheet. B. Helps businesses compare profitability of non-identical enterprises. C. Requires businesses to match accounts due with accounts receivable. D. Helps businesses to accurately measure the profitability of their activities.

D. Helps businesses to accurately measure the profitability of their activities.

The focus of finance activities is on Select one: A. Accumulating data for internal use. B. Reporting financial data for external use. C. Determining an organization's tax structure. D. Obtaining and managing an organization's capital.

D. Obtaining and managing an organization's capital.

Heritage Planners Ltd is a consulting group that provides company cars to management. The fleet of vehicles was recently sold for a gain of $5,000. The gain should be classified on the income statement as Select one: A. A reduction to other automobile expense. B. Other operating income in the trading section of the income statement. C. Revenue earned in the ordinary course of business. D. Other income and expenses.

D. Other income and expenses.

Under GAAP, which one of the following expenses incurred by insurers is matched to earned premiums? Select one: A. Interest expense on outstanding debt B. Unrealized loss on investments C. Administrative expenses D. Policy acquisition costs

D. Policy acquisition costs

A unique category on an insurer's balance sheet is deferred policy acquisition costs. A similar category on a non-insurer's balance sheet is Select one: A. Accrued expense. B. Deferred revenue. C. Acquisition expense. D. Prepaid expense.

D. Prepaid expense.

The treasurer of a corporation has decided to implement changes to the corporation's capital structure for the coming fiscal year. She plans to raise more capital through long-term debt, rather than alternate sources. With the implementation of these changes, she expects the total value of the corporation to Select one: A. Be less predictable. B. Decrease. C. Increase. D. Remain the same.

D. Remain the same.

Which one of the following statements best describes the shareholders' equity section of the balance sheet? Select one: A. Shareholders' equity is an asset of the business entity. B. Shareholders' equity is negative when the entity reports a net loss for the year. C. Shareholders' equity decreases by the amount of debt satisfied during the year. D. Shareholders' equity is negative when liabilities exceed assets.

D. Shareholders' equity is negative when liabilities exceed assets.

The income statement provides a detailed explanation of the results of the organization's operations. Net income is found on the income statement as well as the Select one: A. Statement of statutory accounting. B. Balance sheet. C. Form 8-K. D. Statement of changes in shareholders' equity.

D. Statement of changes in shareholders' equity.

Which one of the following best explains how unrealized capital gains have a significant effect on a company's business operations? Select one: A. Unrealized capital gains are offset by increases in interest rates on debt obligations. B. All debt obligations have a significant effect on the company's operating cash flows. C. It is assumed that the gains will eventually be realized and are included in income. D. They are part of the company's economic income and affect the company's net worth.

D. They are part of the company's economic income and affect the company's net worth.

Insurers count premiums as revenue when the premiums are Select one: A. Written. B. Earned C. Recorded. D. Received.

Earned

the requirements for maximizing shareholder wealth include all of these, EXCEPT: Focusing on current profit Recognizing the effects of risk, dividends, and growth on the value of the stock Focusing on the best use of corporate financial resources to increase the value of the stock

Focusing on current profit

The "bottom line" of an income statement shows the organization's Select one: A. Capital expenses. B. Net revenues. C. Capital gains. D. Net income.

net income

Balance Sheet

the financial statement that reports the assets, liabilities, and owners' equity of an organization as of a specific date.

Capital structure

the mix of long-term debt and equity financing

capital budgeting

the process of planning and managing a firm's long-term investments

Sean owns a retail men's clothing store. After a recent fire, the insurance adjuster requested copies of the store's most recent financial statements. The adjuster is most likely to use the statements to Select one: A. Estimate the inventory on hand at the date of loss. B. Evaluate the marketability of the inventory. C. Forecast the store's immediate cash needs.Incorrect. The adjuster is most likely to use the statements to estimate the inventory on hand at the date of loss. D. Classify the inventory loss as covered or denied.

A. Estimate the inventory on hand at the date of loss.

Which one of the following paths best illustrates the flow of financial information within an organization? Select one: A. Financial activity→ Bookkeeping→ Accounting→ Financial statements B. Accounting→ Bookkeeping→ Financial statements C. Financial statements→ Bookkeeping→ Accounting→ Financial activity D. Financial activity→ Accounting→ Financial statements

A. Financial activity→ Bookkeeping→ Accounting→ Financial statements

Gross profit is reported on the income statement. How is gross profit calculated? Select one: A. Gross profit = sales - cost of goods sold B. Gross profit = sales - cost of goods sold - operating income C. Gross profit = sales - cost of goods sold + investment income D. Gross profit = sales - operating expenses

A. Gross profit = sales - cost of goods sold

Which one of the following is a major purpose of the statement of cash flows? Select one: A. It is used to assess the ability to generate positive future cash flows. B. It is used by middle management to assess future resource needs. C. It is used by insurance agents to balance daily bank deposits. D. It is used in the cash allocation process by line managers.

A. It is used to assess the ability to generate positive future cash flows.

Capital accounts shown in the statement of the changes in owners' equity consist of Select one: A. Paid-in capital and retained earnings. B. Par value stock and retained earnings. C. Retained earnings and dividends. D. Dividends and paid-in capital.

A. Paid-in capital and retained earnings.

An insurer's income statement can be described as a financial statement that shows the Select one: A. Relationship between revenues, expenses, and net income B. Relationship between revenues and incurred losses. C. Relationship between assets and income. D. Relationship between revenues and liabilities.

A. Relationship between revenues, expenses, and net income

All underwriters at Wheaton Insurance are required to evaluate the clients' assets and liabilities before renewing a policy for a retail sales company. The underwriters use this evaluation to A. Screen for an acceptable level of financial stability.Correct. The underwriters use this evaluation to screen for an acceptable level of financial stability. B. Forecast the value of insurable inventory. C. Evaluate the adequacy of the gross profit margin. D. Estimate the value of non-reported inventory.

A. Screen for an acceptable level of financial stability.

Under the cost principal of generally accepted accounting principles (GAAP), Select one: A. Transactions must be recorded at their acquisition cost. B. Transactions must be recorded at their fair market value. C. Transaction records must reflect any premium or discount. D. Transactions must be recorded consistently, either at acquisition cost or fair market value

A. Transactions must be recorded at their acquisition cost.

The analysis of a potential insured's financial statements can determine an insurer's decisions on Select one: A. Underwriting.Correct. The underwriting decision about whether to insure an account requires an analysis of the potential insured's financial statements to determine the appropriateness of the type and amount of coverage requested. B. Claim handling. C. Regulatory reporting. D. Policy interpretation.

A. Underwriting.

Ace Woodworking Company makes household furniture. Which one of the following best describes an expense that should be classified as an operating expense on Ace's income statement? Select one: A. Utility charges for the manufacturing plant B. Payments to lumber suppliers C. Wages paid to furniture assemblers D. Costs for new factory equipment

A. Utility charges for the manufacturing plant

The board of ABC Insurance Company has determined that it will issue preferred stock to its vice presidents in lieu of cash bonuses. The stock will be issued with a call option. The price will be determined with the same method used to price Select one: A. A bond. B. A perpetuity. C. Common stock. D. Convertible stock.

A bond

An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses is: Surplus relief A ceding commission A special purpose vehicle A loss portfolio transfer

A ceding commission

An annuity that continues paying indefinitely is called: A variable annuity. An annuity due. An ordinary annuity. A perpetuity.

A perpetuity.

unauthorized reinsurer

A reinsurer that is not licensed or otherwise authorized to do business in the primary insurer's state of domicile

James wants to buy a house in five years and estimates that he will need to accumulate $60,000 for a down payment over the next five years. If a savings account pays eight percent compounded annually, how much should James deposit at the end of each of the next five years? Select one: A. $10,227 B. $10,625 C. $10,831 D. $11,040

A. $10,227 Correct. James should deposit at the end of each of the next five years $10,227. Annuity=Future Value of an Annuity÷Future Value of an Annuity Factor from the table. $10,227=$60,000÷5.8666 (from the FVA table at 8% over 5 years).

In managing a bond portfolio, the magnitude of the price change is a crucial factor. Therefore, the most volatile bond portfolio is one made up of long maturity Select one: A. Zero-coupon bonds. B. Floating rate bonds. C. Callable bonds. D. Participating bonds.

A. Zero-coupon bonds.

dupont identity

An analysis of ROA and ROE by breaking them down into their component ratios.

financial intermediary

An entity that obtains money from one source and redirects it to another.

If InsureCo purchases a $10,000 bond for $7,000, a discount of $3,000, with the intent of holding the bond until it matures in three years, how will InsureCo account for the discount using straight-line amortization? A reduction in the bond's recorded value of $1,000 per year No change in the bond's recorded value per year An increase in the bond's recorded value of $1,000 per year An increase in the bond's value at maturity of $7,000

An increase in the bond's recorded value of $1,000 per year

The risk that the value of an asset will be lower than expected is Select one: A. Asset risk. B. Credit risk. C. Underwriting risk. D. Off-balance sheet risk

Asset risk.

In order to ensure that insurers have well-diversified portfolios that support the goals of liquidity and solvency, insurers are typically restricted in the percentage of their: Assets in many of the permitted investments. Liabilities that can be owed to any given company. Revenues that can be shown on the income statement. Expenses that can be paid to any given company.

Assets in many of the permitted investments.

As part of a liability claim settlement, Nicole has been given the choice between an ordinary annuity that pays $14,200 per year for ten years, or a single lump sum payment today. If Nicole believes that a reasonable rate of return is six percent, what is the present value of these payments? Select one: A. $96,584 B. $104,513 C. $133,962 D. $142,000

B. $104,513Correct. PVA=A x PVAF. $14,200 x 7.3601 (from the PVA table) = $104,513. Alternately, use the PVAF formula to determine the factor: [1-(1÷(1+r)n)]÷r

Cash flows for a new project include an initial expenditure of $2,500,000 on January 1st and cash inflows on January 1st of the following 10 years of $475,000 each year. If the appropriate rate of return for this project is 12.5%, what is the net present value of this project? Disregard the effect of depreciation and taxes. Select one: A. -$16,470 B. $129,805 C. $458,530 D. $604,805

B. $129,805 Correct. Using the formula for the present value of an annuity of $1 per period for n periods, determine the factor for a 12.5% rate. Multiplying that factor, 5.5364308, times $475,000 = $2,629,804.63; $2,629,804.63 − $2,500,000 = $129,804.63. If the appropriate rate of return for this project is 12.5%, the net present value of this project is $129,805.

Assuming an interest rate of 8%, the present value of $50,000 received in three years is Select one: A. $7,940. B. $39,690. C. $42,850. D. $46,300.

B. $39,690. Correct. 50,000 X .7938 = 39,690; Based on the factors shown above and assuming an interest rate of 8%, the present value of $50,000 received in three years is $39,690.

A company may increase its financial leverage by Issuing additional shares of common stock. Paying dividends to its shareholders. Borrowing to increase its investable cash. Selling assets and using the funds realized to pay down debt.

Borrowing to increase its investable cash.

companies combined are valued at $1.215 billion. What is the value of the economic gain? Select one: A. $80 million B. $154 million C. $135 million D. $216 million

C. $135 million Gain=Value of combined companies-(value of company A+value of company B). $1.215 billion-($810 million+$270 million)=$135 million

The stock of the Reynold Corporation has been growing at a constant rate of four percent, and the corporation just paid an annual dividend of $4. If investors want a market rate of return of seven percent and the current inflation rate is one percent, what is the price of the corporation's common stock? Select one: A. $83.20 B. $133.33 C. $138.67 D. $208.00

C. $138.67 Correct. Price = Dividend at next dividend date ÷ (Market rate of return − Annual dividend Growth rate) = 1.04 × $4 ÷ (.07 − .04) = $4.16 ÷ .03 = $138.67.

Sam needs to calculate the present value of a stream of three unequal payments. The company will receive $25,000 at the end of year 1, $55,000 at the end of year 2, and $100,000 at the end of year 3. The interest rate is 4%. What is the present value of this stream of payments? Select one: A. $156,525 B. $160,020 C. $163,791 D. $173,160

C. $163,791 Correct. (25,000 X .9615) + (55,000 X .9246) + (100,000 X .8890) = 163,791; The present value of this stream of payments is $163,791.

Manufacturing Company has a large number of ten-year $1,000 face value bonds on the market with a 7 percent coupon paid annually and an 8 percent yield to maturity. Which of the following would be the current price of an individual $1,000 bond? Select one: A. $463.20 B. $469.71 C. $932.91 D. $1,000.00

C. $932.91

Which one of the following is a limitation of the use of ratios in financial statement analysis? Select one: A. They cannot be used to determine whether a company is prospering or declining. B. They fail to provide a basis for identifying areas that need further review. C. There is no concrete guidance for determining which ratios are most important. D. Their use is inappropriate for determining relative performance among companies in the same industry

C. There is no concrete guidance for determining which ratios are most important.

The Snow Corporation owns securities that are classified as securities available for sale. Under generally accepted accounting principles (GAAP), how are gains and losses reported for changes in the fair market valuation of these securities? Select one: A. They are reported only when the securities are sold. B. They are reported on the company's income statement. C. They are reported in other comprehensive income. D. They are reported on the company's cash flow statement.

C. They are reported in other comprehensive income.

In addition to complying with laws and regulations, a corporate code of ethics provides Select one: A. Financial transparency to management. B. Maximization of shareholder wealth. C. The establishment of corporate goals. D. A means of managing ethics in the workplace.

D. A means of managing ethics in the workplac

A company shows the following amounts in its end of year financial statements: Current assets: Cash$300,000 Accounts receivable 700,000 Inventory 10,000,000Total current assets$11,000,000 Total current liabilities$5,000,000 Its working capital is Select one: A. −$4 million. B. $1.1 million. C. $5 million. D. $6 million.

D. $6 million.

Based on the following data from Manufacturing Corporation (MC), which one of the following would be the dollar breakeven point of earnings before interest and taxes (EBIT) between the choices of debt financing verses equity financing to raise funds that MC needs? Capital to be raised $2 million Cost of debt $200,000 Present number of shares outstanding 100,000 Additional shares to be sold 50,000 Select one: A. $100,000 B. $400,000 C. $500,000 D. $600,000

D. $600,000 (EBIT - $200,000) ÷ 100,000 = EBIT ÷ 150,000; EBIT = $600,000

William wants to sell his historic bed and breakfast property. The inn's net operating income has been approximately $50,000 for the past five years. A potential buyer's cap rate is eight percent. What is the present value of the property? Select one: A. $250,000 B. $270,000 C. $525,000 D. $625,000

D. $625,000 $50,000 / .08 = $625,000

Mondano Bros. Inc. has 1.5 million shares outstanding, and it issues an additional 600,000 shares to purchase Tejano Corp. After the two companies combine, their combined value is $225 million and there are 2.1 million shares outstanding. The shares held by the former owners of Tejano Corp. are worth Select one: A. $90 million B. $84 million C. $42.9 million D. $64.3 million

D. $64.3 million In a stock acquisition, (shares uses to acquire the company ÷ total shares outstanding) x Value of combined company = value of acquired company shares. (.6 million ÷ 2.1 million) x $225 million = $64.3 million D. $64.3 million

IA Insurance Company's weighted average cost of capital (WACC) is important in determining potential project investments. IIA is considering the investment in a project that will provide a return to IIA of 9 percent. Which one of the following investment mixes will provide an increase in shareholder value with this investment mix? Select one: A. 80 percent common stock at 10 percent and 20 percent debt at 8 percent B. 70 percent common stock at 12 percent, 5 percent preferred stock at 7 percent, and 25 percent debt at 6 percent C. 60 percent common stock at 12 percent and 40 percent debt at 10 percent D. 20 percent common stock at 8 percent and 80 percent debt at 6 percent

D. 20 percent common stock at 8 percent and 80 percent debt at 6 percent WACC = (.7x.12)+(.05x.07)+(.25x.06)=.1025. This is greater than the 9% return for the investment.

Suppose Jamie is underwriting a policy for ABC Company. The company's current assets are $3 million, total assets are $5 million, current liabilities are $1 million, and total liabilities are $3 million. What is ABC's current ratio? (Round to nearest hundredth.) Select one: A. 0.33 B. 0.60 C. 1.66 D. 3.00

D. 3.00

ABC purchased a bond with a maturity of five years on January 1 of this year for $990. The bond pays $70 of interest per year. The price of the bond on December 31 was $1,010. The bond's percentage total return for the year was Select one: A. 2.0%. B. 7.1%. C. 8.9%. D. 9.1%.

D. 9.1%. the bond's percentage total return for the year was 9.1% ($70 + $20)/$990.

The market value of an organization's stockholder shares is likely to be substantially different from the organizations book value. The organization's market value to shareholders is based on Select one: A. Accounting income. B. GAAP accounting rules. C. Economic income. D. SAP accounting rules.

economic income

If a nationally recognized statistical rating organization, such as S&P, were to downgrade a bond from AA to BBB, the yield of the bond would Select one: A. Increase. B. Be impossible to determine. C. Decrease. D. Not be affected.

increase

Dave is an underwriter with Business Income Insurance Company. While reviewing an application for business income coverage, Dave decided to review the applicant's financial ratios as determined by two business analysis companies. The first showed that the applicant's net profit margin was 17 percent. The second showed that the applicant's net profit margin was 14 percent. Dave determined the discrepancy was because one analyst used net income divided by sales to measure the profit margin, while the other analyst used earning before interest and taxes divided by sales to determine the profit margin. These differing values illustrate the importance of considering Select one: A. Trends in ratios. B. Measurement error. C. GAAP versus statutory accounting. D. Ratio consistency.

ratio consistency

Morgan Taylor is Vice President of Underwriting with Solid Rock Insurance Company. The president of her company announced that he wants to reduce expenses and will meet with the vice presidents of each area. In preparation for her meeting with the president, Morgan calculated two ratios for the last five years. First, she calculated underwriting expenses as a percentage of direct premiums written. Second, she divided direct premiums written by the number of underwriters. Over the last five years, underwriting expenses as a percentage of direct premiums written have declined, while the direct premiums written per underwriter has increased. The type of analysis Morgan performed is called Select one: A. Ratio analysis. B. Horizontal analysis. C. Trend analysis. D. Vertical analysis.

trend analysis

In the liquidation perspective used in SAP financial statements, assets are valued at what they would bring in a quick sale, and liabilities are valued at the highest point in their range of possible values. True False

true

Swaps are commonly used to manage interest rate and currency rate of exchange risk. True False

true

An insurer's capacity is primarily determined by comparing its capital to its Select one: A. Written premiums. B. Assets. C. Incurred losses. D. Surplus.

written premiums

Sun Company's computer system must be replaced in five years at a cost of $100,000. The owners have placed $60,000 in an investment that pays 12 percent compounded quarterly and matures in five years. When this investment matures, how much additional money, if any, will Sun Company need to replace the computer system? Select one: A. $ 0 B. $ 6,250 C. $ 9,345 D. $11,885

$0 Correct. FV = PV x (1+r)n. Use the FV factor from the table 3% over 20 periods to account for the quarterly compounding. $60,000 x 1.8061 = $108,366. This is greater than the $100,000 replacement cost, so $0 additional money is required.

Which one of the following is an example of an efficiency ratio? Select one: A. Accounts receivable turnover ratio B. Net profit margin C. Current ratio D. Debt-to-assets-ratio

. Accounts receivable turnover ratio

Financial statements Select one: A. Are of no use to underwriters or claim representatives. B. Are not useful to insurance professionals because of the limited nature of information provided. C. Can be useful when read individually but fail to provide a comprehensive picture when viewed together. D. Can be used by agents and brokers to assess coverage needs.

. Can be used by agents and brokers to assess coverage needs.

Which one of the following is an example of a leverage ratio? Select one: A. DuPont identity B. Quick ratio C. Debt-to-equity ratio D. Inventory turnover ratio

. Debt-to-equity ratio

Under generally accepted accounting principles (GAAP), bonds available for sale must be reported on a corporation's balance sheet at Select one: A. Fair value. B. Market value. C. Amortized cost. D. Original cost.

. Fair value.

In addition to the effect of interest rate changes and yields to maturity, an investor must consider the actual and the real rate of return on an investment in bonds. Which one of the following is the factor that impacts the actual rate of return to provide a real rate of return? Select one: A. Term structure B. Yield spread C. Inflation. D. Bond price

. Inflation.

Insurer XYZ is looking for funds to increase their investment activity. They have determined that their premiums written to policyholders surplus is 3 to 1 and they have $150 dollars of reserves for every $100 of premium written or a 1.5 to 1 ratio. The result of multiplying these two ratios is 4.5 which equals XYZ's Select one: A. Cash flow. B. Insurance leverage C. Debt cost. D. Financial leverage.

. Insurance leverage

The risk-based capital (RBC) system determines the minimum amount of capital an insurer needs to support its operations. In addition to an objective test of an insurer's solvency it Select one: A. Measures the loss volability of the types of insurance written. B. Defines the opportunity cost of funds provided by investors. C. Matches regulatory action to the level of solvency concern D. Provides for the amount of fines the insurer is faced with.

. Matches regulatory action to the level of solvency concern

Beta is a measure of relative risk. An investment portfolio consisting entirely of U.S. Treasury securities would have a beta Select one: A. Of exactly zero. B. Of exactly 1.0. C. Higher than 1.0. D. Lower than zero.

. Of exactly zero.

Random Insurance Company, specializing in property and casualty insurance, is considering purchasing Infinity Insurance Company to increase its competitive position in the marketplace, broaden its coverage area across the United States, and utilize technological efficiencies. After Random Insurance Company's accountants review the notes to financial statements found in Infinity Insurance Company's most recent annual statement, the accountants provide management with a revised offer price reflecting a significant downward adjustment from their original estimate. The accountants explain to management that the adjustment was made based on a disclosure Select one: A. Of unsecured reinsurance recoverables from an AA-rated reinsurer. B. Regarding a potential liability due to pending litigation. C. Indicating that policy processing is outsourced domestically. D. That Infinity's employee benefit plans have negligible unfunded prior costs.

. Regarding a potential liability due to pending litigation.

Which one of the following statements is correct regarding the NAIC Own Risk and Solvency Assessment (ORSA) Guidance Manual? Select one: A. The ORSA Guidance Manual gives insurers discretion regarding the amount of details reported and flexibility on timing. B. The ORSA Guidance Manual helps an insurer determine the minimum capital required in order to avoid regulatory action. C. The ORSA Guidance Manual specifies the supporting documents that must be included with the assessment. D. The ORSA Guidance Manual helps an insurer assess its solvency based on detailed financial reports from the previous five years.

. The ORSA Guidance Manual gives insurers discretion regarding the amount of details reported and flexibility on timing.

ABC Insurance Company purchased a $100,000 par value bond with a coupon rate of 7 percent. ABC paid $98,950 for the bond and paid a broker fee of $25 for the transaction. When reporting this transaction on its balance sheet, the bond should be valued at Select one: A. The purchase price plus the broker fee. B. The par value less the annual coupon payment. C. The current market price of the bond plus the annual coupon payment. D. The par value of the bond plus the broker fee.

. The purchase price plus the broker fee.

ABC Insurance Company uses the Capital Asset Pricing Model (CAPM) method to calculate its cost of equity capital. The company has a beta of 1.05. The risk-free interest rate is 5 percent and the expected market return is 10 percent. ABC's cost of equity using the CAPM method is Select one: A. .1025. B. .1525. C. .2075. D. 1.0475.

.1025 The cost of equity using the CAPM method is .1025. KE = rf + ß(rm - rf). or .05 + [1.05 X (.10 - .05)].

Which one of the following is a major purpose of the statement of cash flows? Select one: A. It is used by middle management to assess future resource needs. B. It is used in the cash allocation process by line managers. C. It is used to assess an organization's need for additional financing. D. It is used by insurance brokers to balance daily bank deposits.

.Correct. It is used to determine an organization's ability to generate positive cash flows, its ability to meet financial obligations, and its need for additional financing. It is also used to determine the reasons for any differences between net income and associated cash receipts and disbursements.

An asset's beta coefficient describes the variability in the price of the asset. Which one of the following beta's would represent the least volatile stock price? Select one: A. 0.78 B. 0.95 C. 1.00 D. 1.10

0.78

If the risk-free rate of return is three percent and the expected market rate of return is 11 percent, what is the expected return for a stock portfolio with a beta of 1.25? Select one: A. 13.00 percent B. 15.25 percent C. 16.75 percent D. 17.50 percent

13% Expected Return = .03 + [1.25(.11 - .03)] = .13 (13%)

Financial leverage analysis is a technique used for comparing earnings per share (EPS) under alternate capitalization plans with varying levels of debt and equity. A Nyce Place to Work (ANPTW) is planning an expansion of their operations and needs to determine how to raise the capital necessary to fund the expansion. ANPTW needs $2,500,000 in new capital and has two choices on how to raise the funds. First, ANPTW can sell common shares at $50.00 per share. Second, they could issue debt (bonds) that require 10 percent per year in interest payments. The expansion will double ANPTW's EBIT to $2,000,000 per year. Financial Statement Excerpts: A Nyce Place to Work 20XX Income Statement (All Equity Structure) EBIT$1,000,000 Interest Expense$0 Net Income (NI)$1,000,000 Balance Sheet Assets$5,000,000 Liabilities$0 Equity$5,000,000 Total (Liabilities and Shareholders' Equity)$5,000,000 Common Shares Outstanding100,000 Calculate: Return on Equity20.00% Earnings per Share$10.00 How many common shares will be outstanding if ANPTW sells common shares to raise the funds? Select one: A. 100,000 B. 125,000 C. 150,000 D. 200,000

150,000 $2,500,000 in new capital ÷ $50 per share = 50,000 new shares. 100,000 shares plus the additional 50,000 shares brings the total to 150,000.

A bond with a face value of $1,000 has had a three percent rate of return over the last year. If there had been a $10 capital gain over this period, what is the bond's coupon rate? Select one: A. 0.5% B. 1% C. 2% D. 3%

2% Rate of return = (x + $10/$1,000) = .03 or 3 percent. Therefore, x = $20, which is a coupon rate of 2 percent

ABC Insurance Company purchased a $100,000 par value bond with a coupon rate of 7.8 percent on June 30, 20X2 for $109,000. ABC sold the bond on June 29, 20X3 after earning an annual rate of return 5 percent during the year. Given that information, what was the capital loss on this bond during the year? Select one: A. $2,200 B. $2,350 C. $5,450 D. $7,800

2,350 ARR for a bond = (interest+capital gains)÷bond price at beginning of year. .05 = ($7,800+X)÷$109,000. .05x$109,000 = ($7,800+X). $5,450-$7,800 = -$2,350 ($2,350 capital loss)

ABC Retail shows the following amounts in its end of year financial statements: Accounts receivable$500,000 Inventory$5,000,000 Credit sales$10,000,000 Cost of goods sold$20,000,000 Based on these figures, its accounts receivable turnover ratio is Select one: A. 4 times. B. 10 times. C 20 times. D. 40 times.

20 times

An underwriter is trying to determine XYZ Manufacturing's efficiency using the accounts receivable (A/R) turnover ratio. XYZ's income statement shows $10 million in sales (half of which is attributable to credit sales) and the balance sheet shows $200,000 in A/R. What is XYZ's accounts receivable turnover ratio? Select one: A. .02 times B. .04 times C. 25 times D. 50 times

25 times

Bedrock Insurance Company's year-end financial statements were just released. The company had total assets of $600 million and total liabilities of $500 million. The company's net income for the year was $5 million. What was Bedrock Insurance Company's return on equity (ROE)? Select one: A. 0.67% B. 1.00% C. 2.50% D. 5.00%

5% ROE = Net income ÷ capital. $5 million ÷ $100 million = .05 (5%)

Treadwell Insurance Company's ratio of premium written to surplus is 2 to 1. The company has reserves of $1.60 for each $1.00 of premiums written. What is Treadwell Insurance Company's insurance leverage? Select one: A. 1.25 B. 2.67 C. 3.20 D. 3.60

3.20 (2 ÷ 1) x (1.6 ÷ 1) = 3.20

IIA Insurance Company (IIA) had issued 30 year $1,000 bonds at 6 percent five years ago. These bonds are currently selling at $900 which represents a yield to maturity or cost of debt of 6.5 percent. IIA has a marginal federal tax rate of 40 percent. Which one of the following is the after tax cost of this bond issue? Select one: A. 2.4 percent B. 2.6 percent C. 3.6 percent D. 3.9 percent

3.9 It is the yield to maturity x (1- marginal tax rate) or 6.5 percent x (1 - .40) or 3.9 percent.

Because of her income tax rate, Carla is indifferent between the purchase of a municipal bond with a 4.2 percent coupon rate and a corporate bond with a 6.0 percent coupon rate. If both bonds have otherwise equivalent characteristics and risk factors, Carla's income tax rate is Select one: A. 28%. B. 30%. C. 35%. D. 42%.

30%

IIA insurance Company (IIA) is primarily a medical malpractice insurer with its reserves having an average duration of six years. Since IIA's stockholders expect a return on their investment in IIA, the money funding these reserves has a cost to IIA. With $100 million in reserves, IIA determines the cost of these reserves in the same manner as the cost of debt. The yield to the 6 year duration of the reserves is 6 percent and IIA has a marginal tax rate of 40 percent. Which one of the following is the after-tax rate of these reserves? Select one: A. 2.4 percent B. 3.6 percent C. 4.0 percent D. 6.0 percent

4% The after-tax cost of these reserves is 6 percent x (1 - .40) or 3.6 percent.

Paul wants to move half of his retirement savings into a fixed income investment. He is considering investing $500,000 today for five years, at which time the value of the account is guaranteed to be $638,150. The expected annual rate of return for this investment is Select one: A. 2.00%. B. 3.00%. C. 4.00%. D. 5.00%.

5%

In 2001, Mark deposited $10,000 in a ten-year certificate of deposit that paid 6 percent per year, compounded semi-annually. The effective annual rate of interest is Select one: A. 6.02%. B. 6.03%. C. 6.06%. D. 6.09%.

6.09% effective annual interest rate multiplies the result of 1+ (the annual interest rate divided by the number of periods per year) by itself for the number of periods per year, and subtracts 1. For semi-annual (2x) payments per year at 6%: (1.03 x 1.03) -1 = .0609 (6.09%).

ABC Insurance Company owns 1,200 shares of Detler Industries in its investment portfolio. During 20X3, those shares paid total dividends of $2,376 and rose in value from $72.20 per share to $74.60 per share. ABC's annual rate of return for this investment was Select one: A. 4.9%. B. 5.4%. C. 6.1%. D. 6.5%.

6.1% Calculate capital gain: $74.60 - $72.20 = $2.40. Calculate dividend per share: $2,376 ÷ 1,200 = $1.98. ($2.40 + $1.98) ÷ $72.20 = .061 (6.1%)

Jane inherited $23,000, which she plans invest in an account that pays eight percent annually. Jane plans to liquidate the account when its value is $43,000. The account will reach $43,000 in approximately Select one: A. 5 years. B. 6 years. C. 7 years. D. 8 years.

8 years

An investment advisor suggested that Roger deposit $10,000 in a fixed rate investment vehicle that matures in six years. The maturity value will be $15,869. What is the expected annual rate of return? Select one: A. 6.00% B. 7.00% C. 8.00% D. 9.00%

8%

Which one of the following sections of the Own Risk and Solvency Assessment (ORSA) Summary Report should quantify the insurer's risks under both normal and stressed situations, considering operational, credit, cash flow, and market conditions? Select one: A. Assessment of Risk Exposure B. Risk Management Framework C. Prospective Solvency Assessment D. Investment Framework

A. Assessment of Risk Exposure

Bob Brown purchased a five-year annuity. It has a 4% interest rate paying $500 after the first year, $550 after the second year, $400 after the third year, $600 after the fourth year, and $650 after the fifth year. The present value of this annuity is Select one: A. $2,392.00 B. $2,592.00. C. $2,808.00. D. $2,910.25.

A. $2,392.00.Correct. ($500 × .9615) + ($550 × .9246 ) + ($400 × .8890) + ($600 × .8548) + ($650 × .8219) = $2,392; The present value of this annuity is $2,392.00.

ABC Bank is selling a jumbo certificate of deposit that will pay the owner a single payment of $250,000 one year from today. The CD is priced so that the investor is expected to earn 3% interest over the next year. Given that information, what is the price of this CD today? Select one: A. $242,718 B. $243,896 C. $245,000 D. $246,932

A. $242,718Correct. $250,000 ÷ 1.03 = $242,718. The price of this CD today is $242,718.

Nicolas Properties, Inc. invests in real estate rental properties. Management's required rate of return is 12 percent. Management is considering purchasing a commercial rental property that generates annual net operating income of $360,000. What is the present value of this property? Select one: A. $3,000,000 B. $3,300,000 C. $3,600,000 D. $3,900,000

A. $3,000,000 Correct. The present value of this property is $3,000,000. Based on the concept of valuing income-producing property as a Perpetuity, divide the periodic income by the discount rate (required rate of return/cap rate). $360,000 / .12 = $3,000,000

A company with significant excess cash might be in a business where growth has slowed. Which one of the following would be the best use of this excess cash for the future interest of the shareholders? Select one: A. An acquisition with greater returns B. Increase earnings per share C. Increasing the stockholder dividends

A. An acquisition with greater returns

The distinguishing feature between an ordinary annuity and an annuity due is that Select one: A. An annuity due is paid or received at the beginning of each period while an ordinary annuity is paid or received at the end of each period. B. An ordinary annuity features periodic payments, while an annuity due is a single lump sum payment due today. C. An ordinary annuity has a future value, while an annuity due does not. D. An annuity due refers to annuity payments received, while an ordinary annuity refers to annuity payments paid out.

A. An annuity due is paid or received at the beginning of each period while an ordinary annuity is paid or received at the end of each period.

The effect of a stock insurance company increasing its insurance leverage, if underwriting results are favorable, is Select one: A. An increased return for shareholders. B. A reduction of risk for the policyowners. C. An increase in the amount of the portfolio held in bonds. D. A reduction in policyholders' surplus.

A. An increased return for shareholders.

If an insurer could precisely match the maturity value of its bond investments with the amount of expected loss payments in the future so that the cash inflows exactly matched the cash outflows, it could reduce its exposure to interest rate risk, which is the uncertainty about Select one: A. Asset values resulting from changes in market interest rates. B. Underwriting risk and the variability of loss reserve estimates. C. Market risk such as exposure to recessions. D. Whether a bond issuer will pay debts as agreed or go into default on its obligations.

A. Asset values resulting from changes in market interest rates.

The financial strength ratings (FSR) used by A.M. Best fall into two board categories: secure and vulnerable. Secure rating range from A++ down to Select one: A. B+. B. B. C. C++. D. C.

A. B+.

Using market value accounting in insurer financial statements when reporting the value of financial assets such as common stock Select one: A. Can create significant fluctuations in balance sheet values over time. B. Contradicts the principle of using mark-to-market valuation to ensure balance sheet stability. C. Leads to reporting the same constant value each year on the balance sheet, thus promoting stability. D. Is only permissible when the stock is privately traded between professional investment organizations such as pension funds or mutual funds.

A. Can create significant fluctuations in balance sheet values over time.

Business acquisitions occur to reduce costs, make more effective use of resources, and positively affect the value of the company. By combining companies, cost efficiency is said to have been reached when costs Select one: A. Cannot be further decreased with the present level of output. B. Have been reduced below the total costs of the individual companies. C. Have met the reduction goal that was set by management. D. Have shown a steady consistent trend downward after the acquisition.

A. Cannot be further decreased with the present level of output.

To determine an insurer's liquidity, Select one: A. Cash and high-grade invested assets are compared to policyholder obligations. B. Cost of goods sold is compared to inventory. C. Sales are compared to accounts receivable. D. Net written premium is compared to policyholders' surplus.

A. Cash and high-grade invested assets are compared to policyholder obligations.

An increase or decrease of 33 percent or less is considered acceptable for what overall IRIS test ratio? Select one: A. Change in Net Premiums Written ratio B. Surplus Aid to Policyholders' Surplus ratio C. Gross Premiums Written to Policyholders' Surplus ratio D. Net Premiums Written to Policyholders' Surplus ratio

A. Change in Net Premiums Written ratio

One of the advantages that the owners of common stock have over the owners of preferred stock is that Select one: A. Common stock typically includes the right to vote for the board of directors, giving the common shareholders a greater voice in running the company. B. Although seventy percent of preferred stock dividends are tax exempt, common shareholders have the right to exempt up to eighty percent of common dividends from their taxable income. C. Common stock dividends are always cumulative, whereas preferred stock dividends may or may not be cumulative. D. The par value of common stock is typically higher than the par value of preferred stock, which gives the common stock owners a higher priority for receiving dividend payments.

A. Common stock typically includes the right to vote for the board of directors, giving the common shareholders a greater voice in running the company.

Which one of the following statements about Treasury Inflation-Protected Securities (TIPS) is true? Select one: A. Coupon payments increase or decrease with inflation. B. Coupons are paid monthly. C. They are sold with maturities of two to four years. D. At maturity, the bondholder receives the original principal amount.

A. Coupon payments increase or decrease with inflation.

The magnitude of the price change of a bond depends largely on which one of the following pairs of factors? Select one: A. Coupon rate and maturity B. Face value and purchase price C. Coupon rate and purchase price D. Face value and maturity

A. Coupon rate and maturity

Which one of the following is a characteristic of a Treasury bond? Select one: A. Coupons paid twice a year B. A maturity of three to eight years C. A variable interest rate D. Taxability of interest by state and local governments

A. Coupons paid twice a year

The accounts receivable turnover ratio is calculated by taking Select one: A. Credit sales divided by accounts receivable B. Total sales divided by accounts receivable. C. Accounts receivable divided by total sales. D. Accounts receivable divided by credit sales.

A. Credit sales divided by accounts receivable

The NAIC Own Risk and Solvency Assessment (ORSA) requires that an insurer's Summary Report discuss all of the following topics, EXCEPT: Select one: A. Reinsurance Framework B. Prospective Solvency Assessment C. Assessment of Risk Exposure D. Risk Management Framework

A. Reinsurance Framework

Which one of the following explains how generally accepted accounting principles (GAAP) accounting principles and statutory accounting principles (SAP) accounting principles differ? Select one: A. How they value many assets and liabilities and recognize many revenues and expenses. B. The way that incoming premium is allocated C. The use of historical costs verses current costs D. The effect that income has on company net worth

A. How they value many assets and liabilities and recognize many revenues and expenses.

An advantage to the acquiring company of using a stock financed acquisition is Select one: A. If the stock value of the combined company declines the target company shares in the loss. B. That the values of the companies involved are much easier to calculate. C. That the value of the stock in the combined company generally goes up in value. D. It is more likely to receive approval from the state regulator than a cash purchase.

A. If the stock value of the combined company declines the target company shares in the loss.

Changes in business ownership entail one company acquiring part or all of another company. Which one of the following best explains how a merger differs from an acquisition? Select one: A. In a merger the target company ceases to exist, while in an acquisition it may continue. B. In a merger the two entities become a new entity, while in an acquisition one continues. C. In a merger the target company can continue to exist, while in an acquisition both are dissolved. D. In a merger the process may be hostile or friendly, while an acquisition is always hostile.

A. In a merger the target company ceases to exist, while in an acquisition it may continue.

ABC Insurance Company purchased a $100,000 par value bond with a coupon rate of 5 percent for $99,000. The bond has ten years until maturity. Next year, ABC will report the bond's amortized cost by Select one: A. Increasing the bond's reported value by one-tenth of the $1,000 discount. B. Recording the bond's value as the cost of the bond plus this year's coupon payment minus this year's discount value. C. Marking the bond's amortized cost to market. D. Assigning it a value equal to the market price of the bond as of February 1st of the reporting year.

A. Increasing the bond's reported value by one-tenth of the $1,000 discount.

An insurance company's investment strategy must be tied to its underwriting strategy because Select one: A. Investment returns are used to pay losses as they come due. B. Securities laws require insurers to adhere to higher standards of investment conduct than non-financial firms. C. Strict insurance underwriting standards increase expected investment returns. D. Insurance underwriting results are highly negatively correlated with investment portfolio returns.

A. Investment returns are used to pay losses as they come due.

Which one of the following is a characteristic of the balance sheet of the National Association of Insurance Commissioners (NAIC) Annual Statement? Select one: A. It classifies surplus into three major parts: contributed surplus, unassigned surplus, and treasury stock. B. It generally shows reinsurance recoverables at 50 to 75 percent of potential value because of credit risk. C. It summarizes the insurer's financial position for each month of the insurer's fiscal year. D. It shows only the admitted assets for each asset class.

A. It classifies surplus into three major parts: contributed surplus, unassigned surplus, and treasury stock.

When a commercial bank acts as a financial intermediary, Select one: A. It matches parties with disparate needs. B. The funds are less liquid than those issued directly by corporations. C. It provides the widest range of securities and denominations to borrowers. D. The supply of funds is limited to short-term deposits.

A. It matches parties with disparate needs.

The Malvern Insurance Company has liquid assets which total $12,436,588,121, loss and LAE reserves which total $8,212,232,849, and unearned premium reserves which total $1,123,892,369. Which one of the following statements is true? Select one: A. Its liquidity ratio is above the desired level. B. Its liquidity ratio is calculated using loss reserves that are the final for the year. C. Its liquidity ratio is arrived at by including real-estate investments in the liquid assets amount. D. Its liquidity ratio cannot be evaluated using these figures.

A. Its liquidity ratio is above the desired level. Liquidity ratio = Liquid assets÷Reserves. $12.4 billion ÷ ($8.2 billion + $1.1 billion) = 1.33. Its liquidity ratio is above the desired level of 1.0.

An insurer's balance sheet lists unearned premiums as Select one: A. Liabilities B. Retained earnings. C. Assets. D. Owners' equity.

A. Liabilities

An underwriter wants to estimate if a particular firm can pay off its debt and if a debt repayment will cause a strain in cash. Further, the underwriter wants to identify potential moral or morale hazards. Which one of the following ratios would be most appropriate? Select one: A. Liquidity ratio B. Profitability ratio C. Efficiency ratio D. Leverage ratio

A. Liquidity ratio

Capital markets trade in Select one: A. Long-term securities. B. Long-and short-term securities. C. Short-term securities. D. Mature securities.

A. Long-term securities.

McBrothers and Sons, Inc. showed an earned premium of $4,523,584,371, and incurred losses and LAE of $4,568,662,935, underwriting expenses of $916,828,986, and written premiums of $4,615,768,451. Which one of the following statements is true? Select one: A. McBrothers and Sons, Inc. has a combined ratio that reflects its long-tail lines of business B. McBrothers and Sons, Inc. has a combined ratio that indicates it is able to generate a profit from its core operations. C. McBrothers and Sons, Inc. has a combined ratio that measures its overall post-tax operational profitability. D. McBrothers and Sons, Inc. has a loss ratio that is under 100%.

A. McBrothers and Sons, Inc. has a combined ratio that reflects its long-tail lines of business

Based on the coefficient of variation, which one of the following investment portfolios has the lowest relative risk? Select one: A. Mean return of 10%; standard deviation of 25% B. Mean return of 5%; standard deviation of 15% C. Mean return of 3%; standard deviation of 12% D. Mean return of 2%; standard deviation of 7%

A. Mean return of 10%; standard deviation of 25% standard deviation/mean return) is 25%/10% or 2.5

John is trying to decide whether to invest $10,000 in corporate bonds paying 8 percent or in municipal bonds paying 6 percent. Both have the same risk. John is in a 30 percent federal tax bracket and the inflation rate is 2 percent. Which of the following would be the most profitable investment and the dollar amount John would be ahead in the first year with the more profitable investment? Select one: A. Municipal bond with $40 more B. Municipal bond with $200 more C. Corporate bond with $240 more D. Corporate bond with $360 more

A. Municipal bond with $40 more The corporate bond pays $800 with $240 taxed away or $560 and the municipal bond pays $600 tax free for an additional amount of $40.

The interest earned on which one of the following types of securities is free of federal income taxation? Select one: A. Municipal general obligation bonds B. Treasury bills C. Treasury bonds D. Corporate bonds with high ratings

A. Municipal general obligation bonds

An insurer's premium-to-surplus ratio is calculated by taking Select one: A. Net written premium divided by policyholders' surplus B. Gross written premium divided by policyholders' surplus. C. Earned premium divided by policyholders' surplus. D. Ten percent of policyholders' surplus.

A. Net written premium divided by policyholders' surplus

CES Brokers is considering purchasing several shares of Tylo Industries to diversify their investment portfolio. Prior to the purchase, CES would like detailed information on long-term debt issued by Tylo that is nearing maturity. CES should look for this information in the Select one: A. Notes to the financial statements. B. Statement of changes in owner's equity. C. Audit report. D. Statement of cash flows.

A. Notes to the financial statements.

A portfolio approach is often used to make decisions regarding an investment. Which one of the following is a true statement regarding Modern Portfolio Theory? Select one: A. Once the efficient frontier is reached, no new risk sources can make the portfolio more efficient. C. The efficient frontier minimizes the risk that will be taken for any given investment portfolio. D. Adding new risk factors indefinitely will improve the efficiency of the portfolio in question.

A. Once the efficient frontier is reached, no new risk sources can make the portfolio more efficient.

Warehouse began operations three years ago with one facility. Financed by borrowings, the company acquired four more storage sites over a two year period. What should an analyst most likely conclude after reviewing Warehouse's common-size financial statements for the past three years? Select one: A. Percentage of long-term debt increased relative to total liabilities. B. Percentage of long-term debt decreased relative to stockholders' equity. C. Percentage increase in sales is similar to the percentage increase in interest expense. D. Percentage of cash decreased relative to total fixed assets.

A. Percentage of long-term debt increased relative to total liabilities.

If insurer loss reserves are too low, Select one: A. Policyholders' surplus will be overstated. B. Unearned premium reserves will be too low. C. Policyholders' surplus will be understated. D. Unearned premium reserves will be too high.

A. Policyholders' surplus will be overstated.

Unrealized capital gains are not included in accounting income. Under statutory accounting principles (SAP), unrealized capital gains are included in Select one: A. Policyholders' surplus. B. Liability statement. C. Cash flow statement. D. Shareholders' equity.

A. Policyholders' surplus.

Working capital is the excess of a company's current assets over its current liabilities. Most financially sound companies have a Select one: A. Positive working capital. B. Negative working capital. C. Working capital equal to zero. D. Working capital less than one percent.

A. Positive working capital.

An applicant/insured may pay the premium to his or her insurance agent. How are premium balances due from an agent accounted for on an insurer's financial statements under statutory accounting principles (SAP)? Select one: A. Premium balances due from agents are an admitted asset unless they are more than 90 days past due. B. Premium balances due from agents are a liability until the agents remit the premium, then it can be shown as earned income. C. Premium balances due from agents are counted as earned income, with an offsetting expense for the portion that is not collectible. D. Premium balances due from agents are an admitted asset and a reserve is created for the portion of the premium that may not be collected.

A. Premium balances due from agents are an admitted asset unless they are more than 90 days past due.

The role of the policyholders' surplus is to Select one: A. Provide a cushion to ensure the insurer has enough resources to meet obligations to the policyholders. B. Provide an estimate of the total losses that will be paid for the insurance coverage sold. C. Provide a meaningful valuation of the assets the insurance company owns. D. Provide a place on the balance sheet where the insurer's income and expenses can be matched, and net income recorded.

A. Provide a cushion to ensure the insurer has enough resources to meet obligations to the policyholders.

All of the following are examples of external factors that can affect an insurer's underwriting profit, EXCEPT: Select one: A. Ratemaking B. Inflation C. Competition

A. Ratemaking

APD Insurance writes a liability policy for Pharmaceuticals, Inc. Pharmaceuticals, Inc. has been involved in a class action lawsuit pertaining to deaths related to their experimental cardiac medication. APD anticipates a large settlement within the coming months. As a result, some of APD's financial assets become impaired. The impairment of these assets would be Select one: A. Reflected in shareholders' equity. B. Included in net investment income. C. Counted as an unrealized capital loss as the lawsuit is still pending. D. Included in the insurer's Other Income (Loss) accounting.

A. Reflected in shareholders' equity.

Which one of the following is true regarding state regulatory concerns over dividends paid to stockholders? Select one: A. Regulatory bodies limit an insurer's ability to release capital. B. Dividends would be better spent as premium taxes paid to the state. C. Rates may be too high to be able to pay dividends. D. The regulatory body should be involved in the approval process.

A. Regulatory bodies limit an insurer's ability to release capital.

An option is an agreement that gives the holder the Select one: A. Right, but not the obligation, to buy or sell an asset at a specific price over a period of time. B. Option to purchase a specified asset at a definite time in the future at a price negotiated in the future. C. Duty to sell an asset at a specified price at an unspecified time in the future. D. Obligation to sell an asset at a specified time in the future, but the price is negotiable.

A. Right, but not the obligation, to buy or sell an asset at a specific price over a period of time.

Regarding options, the strike price is the Select one: A. Specific price at which the holder of an option can buy or sell the asset associated with the option. B. Agreement that gives the holder the right to sell an asset at a specific price over a period of time. C. The price at which the seller of the assets will make a profit. D. The price at which the holder of the option will profit.

A. Specific price at which the holder of an option can buy or sell the asset associated with the option.

Which one of the following statements about stock characteristics is true? Select one: A. Stocks have a higher degree of risk than bonds and, therefore, an opportunity for greater returns. B. Stockholder claims have priority over claims of other creditors if the issuing firm declares bankruptcy. C. Once issued, stocks tend to have maturities of between twenty-five and forty years. D. Most stocks are new issues and trade on primary rather than secondary markets.

A. Stocks have a higher degree of risk than bonds and, therefore, an opportunity for greater returns.

Under the Changes in Adjusted Policyholders' Surplus profitability test, adjusted policyholders' surplus changes attributable to these elements are omitted. Select one: A. Surplus notes, capital changes, surplus adjustments B. Changes in non-admitted assets, changes in the provision for reinsurance, dividends to shareholders C. Net remittances to or from the home office, changes in treasury stock, other aggregate write-ins for changes in surplus D. Net income, unrealized capital gains and foreign exchange, changes in deferred income taxes

A. Surplus notes, capital changes, surplus adjustments

Under statutory accounting principles (SAP), which one of the following organizations determines how insurance companies must report the value of the common stocks they hold as investments? Select one: A. The Securities Valuation Office (SVO) of the National Association of Insurance commissioners (NAIC) B. The insurance department of the state where the insurance company is domiciled C. The open market committee of the National Association of Securities Dealers (NASD) D. The U.S. Securities and Exchange Commission (SEC)

A. The Securities Valuation Office (SVO) of the National Association of Insurance commissioners (NAIC)

Under generally accepted accounting principles (GAAP), unrealized gains or losses on stocks are reported in which one of the following financial statements of a corporation? Select one: A. The current-period income statement B. An adjusted prior-period income statement C. The balance sheet D. The owner's equity statement

A. The current-period income statement

Which one of the following is the unique feature of data-storage and data-sharing medium known as the blockchain? Select one: A. The data is independently verified without the intervention of an intermediary C. The velocity with which data is collected and stored D. The vast amount of data that can be stored

A. The data is independently verified without the intervention of an intermediary

When evaluating the price of equities, the stock market relies on which one of the following that is not assigned a value on the financial statements? Select one: A. The entity's reputation in the marketplace B. The tax reporting status of the entity C. The entity's debt assumption during the year D. The entity's outstanding pension liability

A. The entity's reputation in the marketplace

Insurer capacity ratios measure Select one: A. The extent to which an insurer can underwrite additional risks. B. The extent to which an insurer can meet its obligations as they become due. C. The changes in surplus caused by underwriting gains and losses. D. The market value of securities carried on an insurer's balance sheet.

A. The extent to which an insurer can underwrite additional risks.

Liquidity ratios are used to determine a company's ability to pay off its short-term debts. Typically, the higher the value of the ratio, Select one: A. The larger the margin of safety the company possesses to cover its short-term debts. B. The larger the amount of long-term debt the company has incurred. C. The smaller the margin of safety the company possesses to cover its short-term debts. D. The smaller the amount of long-term debt the company has incurred.

A. The larger the margin of safety the company possesses to cover its short-term debts.

The term "efficient" in the efficient market hypotheses refers to which one of the following? Select one: A. The speed and accuracy with which the market translates new information into security prices B. The speed and accuracy with which computers are now used in all aspects of security transactions C. The ability of stock exchanges to process stock trades quickly and at minimal cost D. The ability of corporations to issue new securities at any time

A. The speed and accuracy with which the market translates new information into security prices

Earned premium on the statement of income of the National Association of Insurance Commissioners (NAIC) Annual Statement is calculated as Select one: A. The sum of the year's written premiums plus the unearned premium reserve at the beginning of the year, less the unearned premium reserve at the end of the year. B. The sum of the year's written premiums, less receivables from agents. C. The sum of the year's written premiums plus the unearned premium reserve at the end of the year, less the unearned premium reserve at the beginning of the year. D. The sum of unearned premiums at the beginning and the end of the year.

A. The sum of the year's written premiums plus the unearned premium reserve at the beginning of the year, less the unearned premium reserve at the end of the year.

Management must carefully consider the maximum amount of financial leverage it can use. Which one of the following is true when the level of debt increases to a point that it exceeds the earnings per share benefit? Select one: A. The value of the company will decline. B. Additional borrowing will be necessary. C. Interest paid will be reduced to near zero. D. Dividends paid will exceed the market rate.

A. The value of the company will decline.

Capital gains and losses can have a particularly significant effect on the decision of an insurer to pay stockholders dividends. Which one of the following would be the most likely reason for this effect? Select one: A. The way income is measured B. The large debt capital amount C. An insurer's capital structure D. The type of property-casualty insurer

A. The way income is measured

ABC Insurance Company entered into a quota share reinsurance agreement with XYZ Reinsurance. Under statutory accounting principles, how are reinsurance recoverables from XYZ for unpaid losses and loss adjustment expenses accounted for on ABC's financial statements? Select one: A. They are netted against ABC's loss and loss adjustment expense reserves on the balance sheet. B. They are shown as earned income on ABC's income statement. C. They are netted against ABC's earned premium on the income statement. D. They are shown as an asset on ABC's balance sheet.

A. They are netted against ABC's loss and loss adjustment expense reserves on the balance sheet.

Which one of the following investments would be the most exposed to interest rate risk? Select one: A. U.S. Treasury bonds B. Small cap stocks C. Cash D. Real estate

A. U.S. Treasury bonds

How does the accounting for pension contributions that an insurer makes for nonvested employees differ under statutory accounting principles (SAP) and generally accepted accounting principles (GAAP)? Select one: A. Under SAP, contributions are a nonadmitted asset because it is not readily convertible to cash. GAAP recognizes pension contributions as expenses as they are incurred for all employees. B. Under SAP, the contributions are tax deductible; under GAAP, the contributions are not deductible. C. Under SAP, the contributions are a prepaid expense and hence are an admitted asset; under GAAP, the contributions are recorded as a liability until the employee is vested. D. Under SAP, the contributions are reported to the employees as taxable income; under GAAP, the insurer is permitted to show the contributions as "deferred income" that is not currently taxable.

A. Under SAP, contributions are a nonadmitted asset because it is not readily convertible to cash. GAAP recognizes pension contributions as expenses as they are incurred for all employees.

Which one of the following statements is correct regarding A.M. Best's review of an insurer's balance sheet strength? Select one: A. When reviewing a rating unit's balance sheet strength, A.M. Best is evaluating its ability to meet its financial obligations. B. When evaluating a lead rating unit owned by a holding company, the holding company's financial health should not affect the lead rating unit's evaluation. C. When reviewing a rating unit that is part of a conglomerate organization, the unit's balance sheet strength rating is going to be based mostly on the conglomerate. D. When reviewing a rating unit's balance sheet strength, A.M. Best is evaluating whether the insurer has made an underwriting loss or gain.

A. When reviewing a rating unit's balance sheet strength, A.M. Best is evaluating its ability to meet its financial obligations.

Standard deviation may not be as accurate a measure of risk as the coefficient or variation when comparing two or more data sets Select one: A. With elements of different magnitude. B. Where one mean is 0. C. That closely follow the normal distribution. D. With greatly different values at risk.

A. With elements of different magnitude.

The SEC recognizes three different types of filers with regard to the 10-K deadline. An accelerated filer is a company that has More than $700 million in public float and must file form 10-K within 60 days after the end of the company's fiscal year. At least $90 million in public float and must file form 10-K within 90 days after the end of the company's fiscal year. At least $75 million in public float and must file form 10-K within 75 days after the end of the company's fiscal year. Less than $75 million in public float and must file form 10-K within 90 days after the end of the company's fiscal year.

At least $75 million in public float and must file form 10-K within 75 days after the end of the company's fiscal year.

The regulator may place the insurer under regulatory control, but is not required to do so, at the Company Action Level. Authorized Control Level. Mandatory Control Level. Regulatory Action Level.

Authorized Control Level.

Compared with other industries, insurers do not have large amounts of traditional debt or fixed assets. Which one of the following explains how an insurer can generate insurance leverage to provide additional funds? Select one: A. An insurer can reduce expenses to raise capital. B. An insurer can invest policyholder supplied funds (funds from operations). C. An insurer can pay high dividends to policyholders. D. An insurer can reduce claim payments to policyholders.

B. An insurer can invest policyholder supplied funds (funds from operations).

Reliable Plumbing plans to replace its entire fleet of service vehicles. Reliable expects this investment to result in cash flow savings of $10,000 the first year, $20,000 the second year, and $15,000 the third year. At that time, they expect to have to replace the vehicles again. If the interest rate is 6%, the present value of the savings is Select one: A. $37,783. B. $39,828. C. $42,453. D. $50,937.

B. $39,828.Correct. ($10,000 × .9434) + ($20,000 × .89) + (15,000 × .8396) = $39,828; If the interest rate is 6%, the present value of the savings is $39,828.

Retro Equipment Company is evaluating a plan to refit its machinery. The expected cost is $100,000, payable immediately. The expected reduction in cash outflow at the end of each year is as follows: Years 1, 2, and 3:$30,000 each year Year 4:$20,000 If the interest rate is 7%, what is the net present value of this investment in new machinery? Disregard the effect of depreciation and taxes. Select one: A. -$21,080 B. -$6,013 C. $2,804 D. $7,700

B. -$6,013Correct. -$100,000 + ($30,000 × .9346) + ($30,000 × .8734) + ($30,000 × .8163) + ($20,000 × .7629) = −$6,013. The present value of this investment in new machinery is −$6,013.

ABC owns 10,000 shares of Coca Cola stock. Each share paid a dividend of $1.60 during the year, but the share price declined from $53.80 to $51.80 during the year. What is ABC's percentage total return for this investment this year? Select one: A. -3.7% B. -0.7% C. 0.5% D. 3.0%

B. -0.7%Correct. ABC's percentage total return for this investment this year is -0.7% ($1.60 + (51.80 - 53.80))/53.80.

Financial leverage analysis is a technique used for comparing earnings per share (EPS) under alternate capitalization plans with varying levels of debt and equity. A Nyce Place to Work (ANPTW) is planning an expansion of their operations and needs to determine how to raise the capital necessary to fund the expansion. ANPTW needs $2,500,000 in new capital and has two choices on how to raise the funds. First, ANPTW can sell common shares at $50.00 per share. Second, they could issue debt (bonds) that require 10 percent per year in interest payments. The expansion will double ANPTW's EBIT to $2,000,000 per year. Financial Statement Excerpts: A Nyce Place to Work 20XX Income Statement (All Equity Structure) EBIT$1,000,000 Interest Expense$0 Net Income (NI)$1,000,000 Balance Sheet Assets$5,000,000 Liabilities$0 Equity$5,000,000 Total (Liabilities and Shareholders' Equity)$5,000,000 Common Shares Outstanding100,000 Calculate: Return on Equity20.00% Earnings per Share$10.00 What is the Return on Equity (ROE) that will result if ANPTW sells the common shares to raise the funds? Select one: A. 20 percent B. 26.67 percent C. 33.33 percent D. 35 percent

B. 26.67 percent $2,000,000 ÷ ($5,000,000 + $2,500,000) = .2667 or 26.67 percent. If ANPTW sells the common shares to raise the funds, the ROE will be 26.67 percent.

Under statutory accounting, the immediate effect of a property and liability insurance company writing a new insurance policy is Select one: A. An increase in net income and a reduction in assets. B. A drain on policyholders' surplus C. An increase in assets and a reduction in liabilities. D. A reduction in unearned premiums and an increase in policyholders' surplus.

B. A drain on policyholders' surplus

Which one of the following statements regarding an insurer's liquidity ratio is true? Select one: A. The liquidity ratio measures the profitability of the insurer's core operations. B. A liquidity ratio greater than one indicates the insurer should be able to meet its financial obligations as they become due.. C. When calculating the liquidity ratio, total assets from the insurer's balance sheet are included. D. The lower the liquidity ratio the better.

B. A liquidity ratio greater than one indicates the insurer should be able to meet its financial obligations as they become due..

Marion Insurance anticipates making a one-time $1 million payment in five years for a large liability loss. The investment vehicle that would provide the least amount of interest rate risk if Marion intends to cash-match its investment and underwriting portfolios would be Select one: A. A floating rate bond with a one-year maturity date. B. A zero-coupon bond with a five-year maturity date. C. A floating rate bond with a ten-year maturity date. D. A zero-coupon bond with a fifteen-year maturity date.

B. A zero-coupon bond with a five-year maturity date.

ABC Company's assets grew from $2.2 million in 20X1 to $2.6 million in 20X2. ABC's common size balance sheet for the period is shown below. 20X220X1 Cash17.3%2.3% Receivables (net)7.7%6.8% Inventory13.8%15.9% Current Assets38.8%25.0% Gross Property, Plant & Equipment92.3%109.1% Accumulated Depreciation31.1%34.1% Net Property, Plant & Equipment61.2%75.0% Total Assets100.0 %100.0% Accounts Payable11.5%13.6% Long-term Debt30.8%9.1% Total Liabilities42.3%22.7% Common Stock/Paid In Capital3.9%4.6% Retained Earnings53.8%72.7% Shareholders' Equity57.7%77.3% Which one of the following statements concerning ABC's financial position in 20X2 is most accurate? Select one: A. ABC has reduced its financial leverage. B. ABC has increased its liquidity. C. ABC has sold off part of its property, plant and equipment to raise cash. D. ABC was highly profitability in 20X2.

B. ABC has increased its liquidity.

Which one of the following statements about common stock is most correct? Select one: A. Common stock shareholders have a priority over preferred stock shareholders in receiving dividends. B. Although common stock prices can be very volatile, they tend to earn more for the investor over the long run. C. In addition to tax advantages with respect to dividend payments, common stock always provides the owner with valuable voting rights. D. The dividend payments for common stock are fixed as a percentage of earnings, which makes them relatively predictable.

B. Although common stock prices can be very volatile, they tend to earn more for the investor over the long run.

An insurer wishing to allocate the difference between a bond's purchase price and its face value over its remaining maturity would use Select one: A. Cost accounting to report the price changes from year to year. B. Amortized cost accounting to include a proportional amount of the premium or discount in income each year. C. Market value accounting to report actual changes in the price of the bond when and if it were sold. D. Mark-to-market accounting to limit the amount of price changes reported in the financial statements.

B. Amortized cost accounting to include a proportional amount of the premium or discount in income each year.

Insurers invest heavily in bonds. The most important objective of bond portfolio management is to construct a portfolio in such a way that the Select one: A. Risk of default is eliminated. B. Amount and timing of the investment cash inflows matches the firm's expected cash outflows. C. Cash inflows from the bond coupon payments can be reinvested in equities when the stock market is expected to rise. D. Bond portfolio's beta is minimized.

B. Amount and timing of the investment cash inflows matches the firm's expected cash outflows.

A legal document that details the terms of an investment bond is referred to as Select one: A. A coupon. B. An indenture agreement. D. The principal.

B. An indenture agreement.

The Gross Premiums to Policyholders' Surplus ratio measures Select one: A. Understate policyholders' surplus. B. An insurer's ability to absorb losses before the effects of reinsurance cessions are considered. C. Overstate policyholders' surplus. D. Understate gross premiums.

B. An insurer's ability to absorb losses before the effects of reinsurance cessions are considered.

When evaluating two investment alternatives, an investor must consider the stated annual interest rate as well as the number of compounding periods per year because Select one: A. The higher the number of compounding periods per year, the lower the stated annual interest rate on that investment. B. As the number of compounding periods per year increases, the effective annual interest rate increases over and above the stated annual interest rate. C. The fewer the number of compounding periods per year, the lower the default risk of the investment. D. The fewer the number of compounding periods per year, the higher the income tax rate that is applied to earnings.

B. As the number of compounding periods per year increases, the effective annual interest rate increases over and above the stated annual interest rate.

The liquidity ratio for Beacon Insurance is 1.1. Although 1.1 is considered to be a favorable ratio, regulators may be concerned because Select one: A. Invested assets are valued at cost.. B. Beacon may be too aggressive in valuing reserves for losses and LAE. C. Net written premiums may be below the industry average. D. Most policyholders pay premiums on a monthly payment plan.

B. Beacon may be too aggressive in valuing reserves for losses and LAE.

Sandford Co. and Burkhart Co. are both general merchandise stores. Sanford Co. has $5,000 as net income and $150,000 in sales at the end of the year. Burkhart Co. has $8,000 in net income and $130,000 in sales. The benchmark for the industry is a 2.8 percent profit margin. Which one of the following is true? Select one: A. Neither company is close to being profitable. B. Burkhart Co. is more profitable than Sandford Co. C. Sandford Co. is more profitable than Burkhart Co. D. We cannot determine profitability without knowing the companies' total assets.

B. Burkhart Co. is more profitable than Sandford Co.

The ability of an insurer's management team and the diversification of its business mix are evaluated when A.M. Best is reviewing which one of the following key rating factors of an insurer? Select one: A. Rating lift/drag B. Business profile C. Enterprise risk management D. Operating performance

B. Business profile

The application of trend analysis techniques to a company's financial data usually focuses on Select one: A. Changes in total assets over time. B. Changes in profitability over time. C. Analyzing current financial information. D. Diagnosing aberrant results.

B. Changes in profitability over time.

Generally accepted accounting principles (GAAP) and statutory accounting principles (SAP) vary with regard to income reporting. GAAP requires unrealized investment gains and losses, foreign currency translations, and changes in minimum pension liabilities to be added to net income to determine an income measure. SAP does not require calculation of this income measure. This income measure computed under GAAP is called Select one: A. Income before interest and taxes. B. Comprehensive income C. Provisional income. D. Statutory income.

B. Comprehensive income

Insurer ABC has written $6 million in liability policies in the past year. Of the $6 million, $1.5 million has been paid out in initial expenses to obtain and underwrite the business. It is expected that the loss ratio will be 80 percent or $4.8 million that will be paid out over a three year period leaving an underwriting loss of $300,000. Which one of the following is true regarding the cash flow of ABC? Select one: A. Due to the underwriting loss, the state regulators will cause ABC to close down. B. Continuing to write policies will create a temporary positive cash flow for investment C. Insurance leverage will be forced into an immediate negative position. D. The underwriting loss will cause a negative cash flow to ABC and reduce policyholder surplus.

B. Continuing to write policies will create a temporary positive cash flow for investment

Which one of the following is a category of fintech startups that includes web-enabled platforms that facilitate nonequity and nondebt financing? Select one: A. Personal finance B. Crowdfunding C. Cryptocurrency D. On-demand finance

B. Crowdfunding

Which one of the following ratios can be used to analyze how the assets of a company are being financed? Select one: A. Asset turnover ratio B. Debt-to-assets ratio C. Return on assets D. Debt-to-equity ratio

B. Debt-to-assets ratio

A reason for acquisitions is to take advantage of synergies. Which one of the following examples is an example of synergy from an acquisition? Select one: A. Excess cash available to pay dividends. B. Excess capacity now more fully used. C. An increase in market concentration. D. An increase in earnings per share.

B. Excess capacity now more fully used.

Due diligence is the process of verifying the material facts that affect a target company's value. Which one of the following is true regarding the balance between the costs and benefits of due diligence? Select one: A. Regulators often insist on extensive due diligence by the buyer. B. Excessive due diligence may damage relationships. C. The target benefits the most from extensive due diligence. D. Minimal due diligence is appropriate to minimize the cost.

B. Excessive due diligence may damage relationships.

Market value surplus (MVS) of an insurer = Select one: A. Present value of liabilities - Fair value of liabilities B. Fair value of assets - Fair value of liabilities C. Fair value of assets + Market value margin D. Present value of liabilities + Market value margin

B. Fair value of assets - Fair value of liabilities

Which one of the following statements is true? Select one: A. Insurers generally do not recognize the need for the underwriting process to include financial statement analysis. B. Financial ratio analysis provides the basis for identifying ratios that are not within the normal range for a specific industry and areas that might need further review. C. Financial ratio analysis cannot be used to determine relative performance of companies in the same industry that are of different size. D. Financial ratio analysis cannot be used to determine relative performance of companies in different businesses.

B. Financial ratio analysis provides the basis for identifying ratios that are not within the normal range for a specific industry and areas that might need further review.

Ramirez Pools, a small swimming pool contractor, has submitted an application for insurance to Golden Boar Insurance Company. Attached to the application are current financial statements for Ramirez Pools. The Golden Boar underwriter might analyze the financial statements to help her to assess the applicant's A. Business plan. B. Financial stability.Correct. The Golden Boar underwriter might analyze the financial statements to help her to assess the applicant's financial stability. C. Market value. D. Credit rating.

B. Financial stability.

Which one of the following is an apparent advantage of investment bonds that are collateralized by a pool of mortgages? Select one: A. They are backed by assets of the company issuing the bond. B. First mortgages are guaranteed by the U.S. Government. C. They pay interest at a rate indexed to U.S. Treasury securities. D. The holder has the option to convert to another security.

B. First mortgages are guaranteed by the U.S. Government.

NOP Corporation, a publicly traded company, has a $72 million public float. The company's fiscal year ends on December 31 of each calendar year. On April 30 of the current year, NOP Corporation agreed with certain counterparties to amend the terms of two different derivative contracts. NOP Corporation first reported these transactions on Select one: A. Form 10-K to their state of domicile's insurance department. B. Form 10-Q to the Securities and Exchange Commission. C. Form 8-K to the Securities and Exchange Commission.r. D. Form 8-Q to their state of domicile's insurance department.

B. Form 10-Q to the Securities and Exchange Commission.

Which one of the following statements concerning the uses and differences between Generally Accepted Accounting Principles (GAAP) and Statutory Accounting Principles (SAP) is true? Select one: A. An insurer can choose whether to use GAAP or SAP, but once the decision is made, it must use the selected accounting framework for all financial reporting, regardless of the audience. B. GAAP treats a business as a going concern and focuses on measuring income, while SAP focuses on solvency and meeting policyholder obligations. C. An insurer is required to use SAP whenever it communicates with policyholders and stockholders, and GAAP when communicating with regulators. D. GAAP is far more conservative than SAP with regard to income and expense recognition.

B. GAAP treats a business as a going concern and focuses on measuring income, while SAP focuses on solvency and meeting policyholder obligations.

A key accounting concept is that an organization should be valued as if it will continue to operate indefinitely. This view is known as the Select one: A. Matching principle. B. Going concern concept. C. Market value principle. D. Liquidation perspective.

B. Going concern concept

Which one of these IRIS ratios is intended to measure an insurer's liquidity? Select one: A. Estimated Current Reserve Deficiency to Policyholders' Surplus ratio B. Gross Agents' Balances to Policyholders' Surplus C. Investment Yield ratio D. Gross Premiums Written to Policyholders' Surplus ratio

B. Gross Agents' Balances to Policyholders' Surplus

Efficiency ratios measure Select one: A. A company's ability to convert assets to cash in order to satisfy its obligations. B. How well a company manages and uses its assets. C. The extent to which a company has borrowed money. D. The amount of a company's current assets after deducting its current liabilities.

B. How well a company manages and uses its assets.

Tom is the investment portfolio manager for ABC Insurance Company and is a firm believer in the strong form of the efficient market hypothesis. He is interviewing candidates for a job opening in his department and has asked each of the candidates to explain their philosophy with regard to selecting stocks for ABC's portfolio. Which one of the following answers is most consistent with Tom's efficient markets view? Select one: A. A company's earnings history is the most important indicator of its potential for future growth and can be used to separate winning stocks from losing stocks. B. Individual stocks should be chosen as part of an indexed portfolio that matches the returns to a well known stock index such as the Dow Jones Industrial Average or the Standard and Poors 500 stock index. C. The analysis of professional stock analysts is indispensible in choosing a portfolio of stocks that can consistently beat the market averages. D. Patterns in the prices of individual stocks provide insights as to which stocks will outperform the market in the short run.

B. Individual stocks should be chosen as part of an indexed portfolio that matches the returns to a well known stock index such as the Dow Jones Industrial Average or the Standard and Poors 500 stock index.

House and Home Insurance is evaluating reinsurers' credit worthiness before entering into a reinsurance contract. House and Home has rejected Revolutionary Re based on a review of thirteen financial ratio tests in which Revolutionary Re failed five. House and Home is likely making its credit decision based on the Select one: A. Financial Analysis and Solvency Tracking system (FAST). B. Insurance Regulatory Information System (IRIS). C. Reinsurer Retention Index (RRI). D. Edward Altman Z-score model.

B. Insurance Regulatory Information System (IRIS).

A corporate bond differs somewhat from United States Treasury debt. Which of the following best describes one of the differences? Select one: A. Principal amounts are lower. B. Interest paid is fully taxable. C. Bond terms are longer term. D. Coupons are paid annually.

B. Interest paid is fully taxable.

Cash matching is a process used by insurers to avoid which one of the following types of risk? Select one: A. Credit risk B. Interest rate risk C. Pricing risk D. Systemic risk

B. Interest rate risk

Which one of the following items may not be fairly represented on an entity's financial statements due to the cost principle of accounting? Select one: A. Accounts payable B. Inventory C. Reinsurance recoverables D. Treasury stock

B. Inventory

Publicly traded companies must file a Form 10-K annually with the Securities and Exchange Commission (SEC). Which one of the following best describes the information contained in Form 10-K? Select one: A. It is a form filed with the SEC to announce major events that shareholders should know about. B. It is similar to the annual report but contains more detailed information about the company. C. It is a report containing unaudited financial statements and a MD&A report. D. It highlights certain company data that has resulted in a positive or negative trend

B. It is similar to the annual report but contains more detailed information about the company.

The notes to financial statements contain a description of the type of business and industry in which the organization operates. Which one of the following best explains why this information is important as part of a financial statement? Select one: A. It provides detail on the use of the assets that have been accumulated by the company. B. It puts the financial information into a context that can be better understood. C. It matches the information to specific financial numbers to give the numbers meaning. D. It explains how and why the company has a profit or loss for the period.

B. It puts the financial information into a context that can be better understood.

Which one of the following is an advantage of the auction market structure in the primary market for buying and selling securities? Select one: A. It provides security search services at a low price. B. It virtually eliminates the search for best price. C. It provides a mechanism to locate trading partners. D. It provides a ready market for infrequently sold securities.

B. It virtually eliminates the search for best price.

What effect, if any, will a reduction in an insurer's loss reserves have on net income and policyholders' surplus in the year that any such adjustment is made? Select one: A. It will increase net income and lower policyholders' surplus. B. It will increase both net income and policyholders' surplus. C. It will have no affect on either net income or policyholders' surplus. D. It will lower net income and increase policyholders' surplus.

B. It will increase both net income and policyholders' surplus.

Which one of the following statements about vertical analysis based on common-size statements is true? Select one: A. Its usefulness is limited by the effects of inflation if comparisons are made across time. B. Its focus is on the relative size of each reported item to a common item for each year considered. C. It eliminates the need for an analyst to have an understanding of the industry in which a company operates. D. It requires complex adjustments if an analyst wants to make intercompany comparisons.

B. Its focus is on the relative size of each reported item to a common item for each year considered.

Jane is an investment portfolio manager for ABC Insurance Company. She spends most of her day reviewing the twenty stocks in ABC's portfolio to evaluate trends in sales, earnings, and management initiatives. Which one of the following stock price theories best describes Jane's own views about stock prices? Select one: A. Jane is an adherent of the semi-strong form of stock market efficiency. B. Jane believes in fundamental analysis. C. Jane believes in the strong form of market efficiency. D. Jane is a technical analyst.

B. Jane believes in fundamental analysis.

Statutory accounting adopts a conservative approach to valuing most assets and liabilities, resulting in a conservative statement of policyholders' surplus. This approach assigns values as if the insurer were to immediately cease operations. This approach is known as the Select one: A. Market value perspective. B. Liquidation perspective. C. Historical cost perspective. D. Going concern perspective.

B. Liquidation perspective.

A share of Best Co. stock is traded on the New York Stock Exchange and pays a fixed annual dividend that is not guaranteed. Best may pay a dividend in future years, but past dividends may never be paid. Additionally, the volatility of the stock is greater than the volatility of Best Co. bonds. The stock is callable, and it is less susceptible to a decline in value than other Best stocks. The share of Best Co. stock can best be characterized as Select one: A. Cumulative preferred. B. Non-cumulative preferred. C. Convertible preferred. D. Common stock.

B. Non-cumulative preferred.

Which one of the following correctly describes how the National Association of Insurance Commissioners (NAIC) Own Risk and Solvency Assessment (ORSA) differs from the NAIC's risk-based capital standard? Select one: A. ORSA is rules based rather than principles based. B. ORSA is prospective rather than retrospective in nature. C. ORSA requires insurers to devise a one year business plan rather than a two-to-five year plan. D. ORSA is a qualitative assessment rather than a quantitative assessment.

B. ORSA is prospective rather than retrospective in nature.

Which one of the following is a category of insurtech startups that includes organizations that use web-enabled platforms to facilitate the formation of self-selected risk pools whose members pool premiums and collectively pay for members' insured losses? Select one: A. On-demand insurance B. Peer-to-peer insurance C. Microinsurance D. Crowdfunding

B. Peer-to-peer insurance

Which one of the following best explains the difference between dividends paid to shareholders and those paid to policyholders? Select one: A. Shareholder dividends benefit both the policyholders and the shareholders. B. Policyholder dividends are regarded as an adjustment in the price of insurance. C. Shareholders are able to vote on the payment of policyholder dividends. D. Policyholders are owed the dividend based on their contract of insurance.

B. Policyholder dividends are regarded as an adjustment in the price of insurance.

Which one of the following best represents capital for an insurer? Select one: A. Assets minus liabilities B. Policyholders' surplus and long-term debt C. Policyholders' surplus and current assets D. Paid-in equity and policyholders' surplus

B. Policyholders' surplus and long-term debt

Financial management practices of insurers differ from those of other industries. Which one of the following is a factor that complicates an insurer's decision to pay stockholders dividends? Select one: A. Expected shareholder retention B. Special income measurement rules C. Federal income taxes anticipated D. Discounting future liabilities

B. Special income measurement rules

The creation of a new company from part of an existing company is known as a Select one: A. Consolidation. B. Spin-off. C. Proxy Contest. D. Divestiture.

B. Spin-off.

Which one of the following is the primary source of constraints imposed on insurer investment practices? Select one: A. Market forces B. State regulators C. The Financial Accounting Standards Board (FASB) D. The Securities and Exchange Commission (SEC)

B. State regulators

John works for Megabucks Investment Company. He is responsible for analyzing the market to make good investments. He has observed that the market reacts very quickly to new information about the economy, or a specific industry for example. He also believes that stock prices also incorporate information generally only available to insiders or experts. He believes in the Select one: A. Technical analysis method. B. Strong form efficient market hypothesis. C. Weak form efficient market hypothesis. D. Theory of fundamental analysis.

B. Strong form efficient market hypothesis.

An underwriter is conducting ratio analysis and determines that a company has a current ratio of 1.2. Which one of the following adjustments to the calculation should the underwriter make to ensure that the company is able to meet its short term obligations? Select one: A. Subtract the value of the company's long-term debt from the calculation. B. Subtract the value of the company's inventory from the calculation C. Subtract the value of the company's cash from the calculation. D. Subtract the value of the company's accounts receivable from the calculation.

B. Subtract the value of the company's inventory from the calculation

Tender offers can help a company launch a hostile takeover of another company. A takeover referred to as a "bear hug" occurs when Select one: A. The target finds a friendly buyer referred to as a white knight. B. The bidder's offer is large enough to guarantee stockholder support. C. The buyer has a super majority of shareholders in its control. D. A golden parachute is offered to the target's board members.

B. The bidder's offer is large enough to guarantee stockholder support.

Which one of the following explains why a firm can have a negative working capital liquidity ratio and remain in operation? Select one: A. The company has access to debt to pay off other debts. B. The company expects to collect accounts receivable throughout the year. C. The company plans to issues new shares. D. The company expects to collect accounts payable throughout the year.

B. The company expects to collect accounts receivable throughout the year.

Which one of the following accounting principles may cause a limitation in the use of financial statements to evaluate an organization? Select one: A. The tax basis principle B. The cost principle C. The consistency principle D. The matching principle

B. The cost principle

When quantifying an investment risk by its variance, to measure the deviation of an investment's return from the average, it is useful to convert the variance units back to Select one: A. A measure of the dispersion of the standard deviation. B. The data set units by taking the square root of the answer C. A measure of the asset's volatility to the total market. D. The dispersion between the values in the distribution

B. The data set units by taking the square root of the answer

The way in which the change of ownership and control is accomplished depends on Select one: A. Who has the competitive advantage. B. The result desired. C. The efficiency of the market. D. Whether or not the buyer and the target operate in the same business area.

B. The result desired.

In many instances, a buyer is willing to pay more for a company than the market value of the target company's recorded assets. This is because Select one: A. The combined company's assets are not subject to depreciation. B. The target company may have franchise value. C. The target company may have an existing loan covenant. D. The acquiring company is relying on financial information the target company has provided.

B. The target company may have franchise value.

Which one of the following statements regarding the yield to maturity of a bond is most accurate? Select one: A. The yield to maturity for a municipal bond is set by the Bond Financing Authority, an subagency of the U.S. Department of the Treasury, based on its default risk relative to U.S. Treasury debt. B. The yield to maturity for a bond is determined by the price of the bond, which is shaped by the forces of supply and demand in the bond market. C. The yield to maturity for a U.S. corporate bond is assigned on a quarterly basis by the various bond rating agencies such as Moody's and Standard & Poor's. D. The yield to maturity for a corporate bond is determined by the borrower when the corporation first issues the bond.

B. The yield to maturity for a bond is determined by the price of the bond, which is shaped by the forces of supply and demand in the bond market.

Which one of the following would be a correct statement regarding two corporate common stocks whose values tend to move in opposite directions from each other as the market goes up and down? Select one: A. They would be unsystematic. B. They would be negatively correlated. C. They would be positively correlated D. They would be uncorrelated.

B. They would be negatively correlated.

The overriding business reason for acquisitions is Select one: A. To avoid company bankruptcy. B. To increase value of the company. C. The inability to compete in the market. D. Aggressive management attitude.

B. To increase value of the company.

Equity multiplier is calculated by taking Select one: A. Total sales divided by owners' equity. B. Total assets divided by owners' equity. C. Net income divided by owners' equity. D. Operating income divided by owners' equity.

B. Total assets divided by owners' equity.

An insurer's profitability is based primarily on its Select one: A. Claims handling abilities. B. Underwriting and investment results. C. Underwriting rules and guidelines. D. Investment portfolio makeup.

B. Underwriting and investment results.

When premiums earned during any specific accounting period are less than incurred losses plus underwriting expenses there will be an Select one: A. Increase in surplus. B. Underwriting loss C. Investment loss. D. Underwriting gain.

B. Underwriting loss

By diversifying one's investment exposure by investing in stock, bonds, real estate, and commodities, which one of the following risks would be most affected? Select one: A. Systematic risk B. Unsystematic risk C. Market risk D. Risk-return

B. Unsystematic risk

Financial theory assumes that investors are risk averse. Which one of the following statements best describes risk averse behavior? Select one: A. The investor with the highest risk tolerance will earn the lowest level of returns. B. When faced with a choice of investments that have the same potential payoff, a risk-adverse investor will choose the one with the least risk C. Investors require lower levels of return when faced with higher levels of risk. D. Risk adverse investors tend to focus solely on returns and ignore the level of risk in a diversified portfolio.

B. When faced with a choice of investments that have the same potential payoff, a risk-adverse investor will choose the one with the least risk

ABCXYZ Balance Sheet Cash 0.4%2.3% Receivables 15.4%6.8% Inventory 23.1%15.0% Property, plant & equip (net) 61.2%75.0% Total assets 100.0%100.0% Accounts payable 17.3%13.6% Long-term debt 38.5%6.8% Common stock 3.8%4.5% Retained earnings 40.4%75.0% Total liabilities & equity 100.0%100.0% Income Statement Sales 100.0%100.0% Cost of goods sold 60.6%59.7% Gross profit 39.4%40.3% Operating expenses 19.4%19.2% Operating income 20.0%21.2% Interest expense 3.5%0.5% Income before taxes 16.5%20.7% Income taxes 4.2%7.3% Net income 15.8%13.8% Select one: A. ABC has more modern property, plant and equipment than XYZ B. XYZ pays relatively more income taxes than ABC, perhaps because it has lower financial leverage. C. The interest rate that ABC is required to pay on its debt must be higher than the interest rate that XYZ is required to pay. D. ABC uses less financial leverage than XYZ, which causes it to be earn more profit.

B. XYZ pays relatively more income taxes than ABC, perhaps because it has lower financial leverage.

The value of BenShield Insurance is $540 million dollars. They are acquiring The Matco Company, valued at $180 million. The two companies combined are valued at $810 million. If BenShield pays $216 million in cash to the Matco owners, the BenShield shareholders gain Select one: A. $90 million.I B. $36 million. C. $54 million. D. $22 million.

C. $54 million. Gain=Value of combined companies-(value of company A+value [purchase price] of company B). $810 million-($540 million+$216 million)=$54 million.

Janet purchased a tract of land in the Florida panhandle 10 years ago and earned an average rate of return on her investment of 7%. Today, Janet sold the land for $1,250,000 and must pay capital gains tax on the gain in excess of her original investment. Given this information, how much has her original investment gained in value over the last 10 years? Select one: A. $601,333 B. $609,991 C. $614,625 D. $627,484

C. $614,625 Correct. PV = FVn × PV factor; PV = $1,250,000 × .5083; PV = $635,375; $1,250,000 − $635,375 = $614,625. Her original investment gained $614,625 in value over the last 10 years.

Which one of the following is the coupon rate of a bond with a $1,000 face value, a $40 coupon, and is selling at "80.0"? Select one: A. .010 B. .032 C. .040 D. .050

C. .040Correct. It is $40 / $1,000 = .04.

Retail Corporation (RC) has decided to acquire another company in Europe to expand its market. To raise $5 million in capital RC has decided to sell $100 par value preferred shares with a 9 percent dividend. The shares actually sell for $90 as the market is concerned about the risk involved in the sale. The actual cost of raising capital with this preferred stock issue will be Select one: A. 8.1 percent. B. 9.0 percent. C. 10.0 percent. D. 12.2 percent.

C. 10.0 percent. Correct. The actual cost is the dollar amount of the dividend / market price or $9 / $90 = 10.0 percent.

Manufacturing Corporation (MC) is going to raise $5 million in capital for an expansion of its plant. MC presently has no debt and its present return on equity is 20 percent and earnings per share are $10. No income tax is paid. Based on the following data, what would be the new return on equity if MC raised the needed capital through a $5 million bond issue at 10 percent interest? Present Earnings $2,000,000 Present Equity $10,000,000 Outstanding Shares 200,000 Shares Select one: A. 5 percent B. 10 percent C. 15 percent D. 20 percent

C. 15 percent Correct. The earnings less the interest owed divided by the equity or $2 million less $500,000 = $1.5 million / $10 million = 15 percent.

What is the effective annual interest rate of 5 percent, compounded quarterly? Select one: A. 5.0031% B. 5.0425% C. 5.0945% D. 5.1203%

C. 5.0945% Correct. Effective annual interest rate multiplies the result of 1+ (the annual interest rate divided by the number of periods per year) by itself for the number of periods per year, and subtracts 1. [(1+(.05 / 4))4]-1=.05095

After losing money in the stock market, Ron wants to put his money into a fixed income account. His broker recommends placing $80,000 in an account that is guaranteed to be worth $188,000 in 10 years. What is the investment's expected annual rate of return? Select one: A. 7.41% B. 8.43% C. 8.92% D. 9.01%

C. 8.92%

Joe is analyzing the common size income statement for ABC, Inc., shown below. Joe had noted that ABC's sales had grown by over forty percent during the latest year. Which one of the following statements about these financial statements is most accurate? 20X320X220X1 Sales100.0%100.0%100.0% Cost of Goods Sold53.3%59.5%60.5% Operating Expenses36.7%18.6%19.4% Interest Expense0.5%0.7%0.8% Taxes2.4%5.3%4.9% Net Income7.6%16.6%15.3% Select one: A. The interest rate on ABC's debt is declining, which is enhancing its overall profitability. B. Although sales have increased, operating income has increasing at a faster rate. C. ABC seems to be having a problem controlling its operating expenses in connection with the high level of growth. D. ABC's gross profit margin is declining, which is causing a decline in net income.

C. ABC seems to be having a problem controlling its operating expenses in connection with the high level of growth.

The payment to the seller in an option compensates the seller for Select one: A. The value of the income-producing asset transferred to the investor in exchange for cash. B. Accepting the risk that the buyer will not exercise the option at a future date. C. Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option. D. The future-value of the present income-producing asset for which the set strike price has been reduced.

C. Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option.

The market value surplus of an insurer is equal to the fair value of assets minus the present value of liabilities plus the market value margin. The market value margin is Select one: A. A charge in case the company decides to distribute some of the surplus in dividends. B. A loading in case underwriting experience is negative. C. An additional payment in case the reserves are inadequate. D. An additional payment in case asset values are overstated.

C. An additional payment in case the reserves are inadequate.

The DuPont identity allows return on assets (ROA) to be examined in two components. It is helpful for an insurance professional to understand which of these two components is responsible for the resulting ROA, especially when reviewing an account whose ROA is below the industry benchmark. The two components of ROA using DuPont identity are net profit margin and Select one: A. Sales. B. Equity multiplier. C. Asset turnover. D. Owners' equity

C. Asset turnover.

Policyholders' surplus on the statutory accounting principles (SAP) balance sheet is best represented as Select one: A. Assets + Liabilities. B. Assets. C. Assets - Liabilities. D. Liabilities.

C. Assets - Liabilities.

What prevents an insurer's financial statements from reflecting the insurer's fair market value? Select one: A. Reserves reduce policyholder surplus. B. The NAIC sets the value of insurer liabilities. C. Assets do not include capital gains. D. The cost principle of accounting overstates loss reserve liabilities.

C. Assets do not include capital gains.

Which one of the following statements about insurer capital needs is true? Select one: A. The need to recognize initial policy acquisition costs under accounting rules reduces the need for capital. B. Long-term debt reduces capital. C. Attracting and maintaining capital depends greatly on producing a return on equity competitive with other investments D. The minimum amount of initial capital needed is determined by federal agencies, including the SEC and the FDIC.

C. Attracting and maintaining capital depends greatly on producing a return on equity competitive with other investments

Which one of the following is a long-term liability? Select one: A. Preferred stock B. Commercial paper C. Bonds D. Trade credit

C. Bonds

When a consolidation to takes place, Select one: A. Just the target ceases to exist. B. Both buyer and target may continue to exist. C. Both buyer and target cease to exist. D. Just the buyer ceases to exist.

C. Both buyer and target cease to exist.

An underwriter uses a firm's current assets when calculating the current ratio. Current assets are Select one: A. Assets purchased within the year B. Assets purchased with cash. C. Cash and easily-liquidated assets. D. The excess of assets to liabilities.

C. Cash and easily-liquidated assets.

All of the following typically act as financial intermediaries, EXCEPT: Select one: A. Commercial banks B. Property-casualty insurers C. Contractors D. Life insurers

C. Contractors

Accounts receivable turnover, asset turnover, and inventory turnover are all ratios that measure Select one: A. Liquidity. B. Leverage. C. Efficiency. D. Profitability.

C. Efficiency.

Based on the matching principle, an insurer's premium revenue for a policy should be recognized Select one: A. At the time losses insured under the policy occur B. Only at the end of the policy period. C. Evenly over the term of the policy. D. Up-front at the inception of the policy.

C. Evenly over the term of the policy.

Insurers should report the value of shares of common stock that are publicly traded in liquid, transparent markets using Select one: A. Estimated cost accounting, based on simulation modeling. B. Cost accounting, based on what it would cost to replace the stock. C. Fair value accounting, based on market prices. D. Amortized cost accounting, based on the purchase price.

C. Fair value accounting, based on market prices.

A financial manager is looking to add XYZ stock to the company's investment portfolio. The manager's research shows that XYZ stock is currently returning at 8 percent, while the market rate is 5 percent. Based on this information, XYZ stock likely has a beta of Select one: A. Equal to 1. B. Less than 1. C. Greater than 1. D. Equal to 0.

C. Greater than 1. A higher return would be more risky by definition, so it would have a beta greater than 1

Which one of the following statements about preferred stock is true? Select one: A. Preferred stock usually gives owners voting rights in the issuing corporation. B. The omission of a preferred dividend is considered a default by the issuing corporation. C. Holders of preferred stock have a claim on the assets of the issuing corporation up to a stated par value. D. The stated dividend rate typically adjusts each year with changes in the consumer price index.

C. Holders of preferred stock have a claim on the assets of the issuing corporation up to a stated par value.

Which one of the following would likely lead an insurance commissioner to require an Own Risk and Solvency Assessment (ORSA) from an insurer? Select one: A. If an insurer enters a new state or market B. If an insurer's annual premium falls below a certain threshold level C. If an insurer appears to be in a deteriorating financial condition D. If an insurer withdraws from a segment of business

C. If an insurer appears to be in a deteriorating financial condition

Which one of the following statements concerning insurer financial relationships is true? Select one: A. A high capacity ratio indicates strong financial health. B. The capacity ratio measures the ability of the insurer to use its existing assets to meet its financial obligations. C. Immediately recognizing policy acquisition costs while deferring recognition of the associated revenue causes surplus to decrease D. The excess of written premium over expenses and losses is added to surplus.

C. Immediately recognizing policy acquisition costs while deferring recognition of the associated revenue causes surplus to decrease

An insurance company is currently operating with a debt to equity ratio of 0.5 and they plan to increase that to 1.0 through the issue of additional debt without issuing any additional equity. Taking on additional debt rather than issuing additional equity, assuming the same increase in net income results from either choice, will Select one: A. Decrease the firm's financial risk as no additional equity was issued. B. Increase the firm's financial risk as additional equity has a higher required return. C. Increase the firm's return on equity as no additional equity was issued. D. Decrease the firm's return on equity as no additional equity was issued.

C. Increase the firm's return on equity as no additional equity was issued.

The Sarbanes-Oxley Act has had what effect on due diligence with respect to the acquisition of one insurance company by another insurance company? Select one: A. Eased reporting requirements B. Damaged the ability to attract new customers C. Increased the cost of regulatory compliance D. Little, because it affects only publicly traded companies

C. Increased the cost of regulatory compliance

If an insurer purchases a U.S. Treasury bond at a discount from its face value, then next year's financial statement will Select one: A. Report a lower book value for the bond than this year's financial report. B. Report less investment income on the bond than was reported this year. C. Indicate that the effective coupon payment will be higher than the actual coupon payment received. D. Carry the bond at fair market value, which will be lower than the fair market value reported this year.

C. Indicate that the effective coupon payment will be higher than the actual coupon payment received.

In keeping with a conservative approach to insurer solvency, the primary constraints are on insurer Select one: A. Accounting methods. B. Ownership types. C. Investment practices. D. Liability holdings.

C. Investment practices.

An insurer can improve its balance sheet values by increasing the value of its assets. Which one of the following is a way of accomplishing this? Select one: A. Finite risk reinsurance B. Stepped-up loss reserves C. Sale and leasebac D. Premium growth

C. Sale and leaseback

Capital structure is a corporation's mix of long-term debt and equity. Which one of the following types of debt is considered long-term debt? Select one: A. A bank line of credit B. Merchandise trade credit C. Commercial paper D. A three year bond issue

D. A three year bond issue

Young Tom Klondike has invested his inheritance in bonds, annuities, and stocks. His uncle, Scott White, is a financial adviser and offers to help Tom determine if he has made the best choices to maximize returns on his investments. Scott begins with the stocks and finds Tom has purchased a preferred stock that pays $9 per period at a discount rate of 4 percent. Scott tells Tom that the stock's present value Select one: A. Cannot be calculated because the dividends will be paid in the future. B. Is the purchase price multiplied by the discount rate. C. Is calculated at $225. D. Is determined by the set amount of dividends Tom expects to be paid in the future.

C. Is calculated at $225.Correct. The stock's present value is $225. Based on the concept of valuing income-producing property (including preferred stock) as a Perpetuity, divide the periodic income by the discount rate(required rate of return/cap rate). $9 / .04 = $225

An advantage of using the standard deviation instead of the variance when evaluating the riskiness of returns of an investment portfolio is that the standard deviation Select one: A. Uses more data points in its computation. B. Is more sensitive to extreme values. C. Is expressed in the same units of measure as the original data set. D. Excludes the mean return of the individual data points.

C. Is expressed in the same units of measure as the original data set

Risky Insurance Company has a risk-based capital (RBC) level of 65 percent of the authorized control level. At this level, the regulator Select one: A. Will perform an examination of Risky Insurance Company. B. May place Risky Insurance Company under regulatory control. C. Is required to place Risky Insurance Company under regulatory control D. Will require Risky Insurance Company to file a comprehensive plan.

C. Is required to place Risky Insurance Company under regulatory control

One advantage of economic capital analysis is that Select one: A. It readily explains the mix of long-term debt and equity. B. It is a fundamental review of the capitalization of insurers. C. It focuses attention on the risks attached to each of an organization's activities. D. It relies on underlying assumptions and probability estimates.

C. It focuses attention on the risks attached to each of an organization's activities.

The gain resulting from an acquisition can be calculated using the formula of G=Vab-(Va+Vb) with G as the gain and V the values for each company involved in the acquisition. For the acquisition to make sense what would have to be true regarding the value of Vab? Select one: A. It would have to be at least two times the values of Va and Vb. B. It would have to be at least equal to the total of Va and Vb. C. It would have to be larger than the total of Va and Vb. D. It would have to at least be equal to or larger than G.

C. It would have to be larger than the total of Va and Vb.

A financial market is a mechanism used for trading securities. The market contains Select one: A. Stakeholders. B. Working capital. C. Items being traded. D. Capital budgeting.

C. Items being traded.

In a forward contract, the buyer and seller of a commodity Select one: A. Calculate prices based on industry indexes. B. Speculate on the price in the future. C. Know its price prior to delivery.. D. Estimate prices initially and finalize prices in the future.

C. Know its price prior to delivery..

Which one of the following statements concerning the Gross Change in Policyholders' Surplus ratio is correct? Select one: A. Regulators are only concerned with a decrease in surplus, so the unusual range of values for this ratio is limited to a decrease of more than 10 percent. B. The denominator of this ratio is adjusted to remove the effect of investment gains on policyholders' surplus, thus limiting the surplus changes to those stemming from underwriting losses. C. Large increases could result from positive developments, but could also arise from less favorable situations, such as surplus aid from reinsurance. D. An increase in an insurer's unrealized capital gains can cause a large drop in the results of this ratio and trigger regulatory concern.

C. Large increases could result from positive developments, but could also arise from less favorable situations, such as surplus aid from reinsurance.

Investment portfolios are exposed to a number of different types of risk, depending on the types of investments in the portfolio. Because it cannot be sold quickly, an investment portfolio consisting primarily of commercial real estate would be highly exposed to Select one: A. Interest rate risk. B. Market risk C. Liquidity risk. D. Systematic risk.

C. Liquidity risk.

The board of directors for PDM Metallurgy, Inc. is concerned that it may be targeted for a hostile takeover. The board determines that its best defensive course of action is to provide ARC Welding, Inc. the option to purchase a block of PDM stock in the event of a hostile takeover attempt. This defensive strategy is called Select one: A. Crown jewel. B. White knight. C. Lockup D. Poison pill.

C. Lockup

Which one of the following statements is true regarding catastrophe bonds? Select one: A. As natural disasters rise in frequency and severity, the demand for catastrophe bonds has dropped off. B. Catastrophe bonds are rated based on the probability of the catastrophe occurring, and are usually rated above investment grade. C. Many catastrophe bonds pay a higher interest rate than investment-grade corporate bonds. D. Catastrophe bonds typically have a 10-year maturity.

C. Many catastrophe bonds pay a higher interest rate than investment-grade corporate bonds.

To calculate the fair value of an insurer's reserves, estimated future amounts are discounted to present value and a Select one: A. Discount is applied to assets. B. Review of all liabilities is completed. C. Market value margin is added. D. Discount of investment returns is added.

C. Market value margin is added.

Sharon lives in New York and has inherited some money. She does not want to pay state income tax on the interest. She also would like to support community projects that need funding. She should consider a Select one: A. General obligation municipal bond. B. Eurobond. C. Municipal revenue bond. D. Corporate bond.

C. Municipal revenue bond.

Which one of the following ratios is a gauge of the insurer's retained insurance exposure after reinsurance transactions? Select one: A. Two-Year Overall Operating ratio B. Adjusted Liabilities to Liquid Assets ratio C. Net Premiums Written to Policyholders' Surplus ratio D. Gross Premiums Written to Policyholders' Surplus ratio

C. Net Premiums Written to Policyholders' Surplus ratio

Cameron is evaluating the financial position of ABC Company using the year-to-year income statement data. The period-to-period growth rates of the income statement data is shown below: 20X5-20X420X4-20X320X3-20X2 Sales9.4%10.4%9.1% Cost of Sales3.6%3.8%3.4% Gross Profit12.7%14.6%13.0% Operating Expense14.7%16.1%15.0% Operating Profit-10.9%-0.8%-3.7% Interest Expense-1.3%1.4%-1.3% Taxable Income-24.1%-3.6%-6.7% Income Taxes-27.3%0.0%-8.3% Net Income-21.9%-5.9%-5.6% Which one of the following statements best describes the trends in the financial data? Select one: A. High tax rates are hurting ABC's operating profitability. B. ABC has earned a negative gross profit margin during each of these three years. C. Operating costs are increasing at a faster rate than sales, which is causing ABC's operating profits to decline. D. The low growth in the cost of sales is adversely affecting the profit margins

C. Operating costs are increasing at a faster rate than sales, which is causing ABC's operating profits to decline.

New Insurance Company began operations last year. The managers of New Insurance Company thought they had adequate capital to begin operations. However, the company wrote more insurance than anticipated. Statutory accounting requires policy acquisition costs to be realized up-front, and the company's surplus was depleted. New Insurance Company was forced to sell additional shares of stock to replenish policyholders' surplus. The sale of additional shares of stock to raise money for this purpose illustrates which one of the following insurance company capital needs? Select one: A. Regulatory needs for capital B. Investor needs for capital C. Operational needs for capital D. Policyholders' need for capital

C. Operational needs for capital

Which one of the following statements about asset-backed securities is true? Select one: A. They are typically in the form of debenture bonds. B. Federal regulations require that they be collateralized by a pool of mortgages. C. Payments on the underlying collateralized assets are passed directly to investors. D. They eliminate credit risk.

C. Payments on the underlying collateralized assets are passed directly to investors.

Investment managers are often judged on the performance of a stock portfolio relative to a particular market index, adjusted for the portfolio's beta. Which one of the following investment portfolios would be most likely to match the overall returns for the S&P 500 stock index? Select one: A. Portfolio A with a beta of -0.5 B. Portfolio B with a beta of 0.8 C. Portfolio C with a beta of 1.0 D. Portfolio D with a beta of 1.2

C. Portfolio C with a beta of 1.0

Which one of the following statements about portfolio diversification is the most accurate? Select one: A. In order to achieve diversification in a stock portfolio, it is necessary that at least one of the stock's returns have a negative correlation with the other stocks in the portfolio. B. Diversification is intended to eliminate the portfolio's exposure to market risks such as recession and changes in interest rate levels. C. Portfolio diversification reduces the investor's exposure to company-specific events such as strikes or products liability lawsuits, but does not eliminate general market risk D. Diversification is the process of reducing the number of stocks in a portfolio until the expected portfolio return is equal to the risk-free rate.

C. Portfolio diversification reduces the investor's exposure to company-specific events such as strikes or products liability lawsuits, but does not eliminate general market risk

Insurers can use reinsurance in several ways to manage their capital. Ceding commissions paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses help manage capital by Select one: A. Reducing its exposure to risk. B. Transferring loss liabilities. C. Providing surplus relief. D. Raising capital equity.

C. Providing surplus relief

Through an acquisition the combined companies can often reduce the company's exposure to bankruptcy, reduce the cost of future debt issues and obtain more favorable terms from suppliers. As a reason for acquisition, these gains would be considered Select one: A. An efficient use of excess funds. B. A revenue and cost advantage. C. Reduced cost of financial distress. D. A decided federal tax advantage.

C. Reduced cost of financial distress.

Payment of dividends is one way to distribute income to company owners. An additional way to distribute income to company owners is to Select one: A. Issue new shares of stock. B. Alter the capital structure. C. Repurchase corporate stock. D. Use GAAP accounting.

C. Repurchase corporate stock.

Although the risks associated with leverage are of concern to all companies, the solvency orientation of insurance regulators makes it particularly important to evaluate leverage for insurers. One of the widely used ratios to determine insurance leverage is the Select one: A. Debt-to-equity ratio. B. Debts-to-assets ratio. C. Reserves-to-surplus ratio. D. Reserves-to premium ratio.

C. Reserves-to-surplus ratio.

The National Association of Insurance Commissioners (NAIC) has developed guidelines for how much capital an insurance company must have to support the insurer's operations. This measure is called an insurer's Select one: A. Net premiums written to policyholders' surplus. B. IRIS ratio. C. Risk-based capital. D. Kenney ratio.

C. Risk-based capital.

Which one of the following statements about various schedules to the National Association of Insurance Commissioners (NAIC) Annual Statement is true? Select one: A. Schedule P aggregates information into two lines of insurance—property and liability. B. Schedule P reports up to five years of loss data on a calendar-year basis. C. Schedule F provides information the insurer's reinsurance arrangements, including reinsurance assumed and reinsurance ceded. D. Schedule D is limited to summary data about an insurer's investments.

C. Schedule F provides information the insurer's reinsurance arrangements, including reinsurance assumed and reinsurance ceded.

Which one of the following risk management techniques used by financial institutions to avoid credit risk has been known to lead to systemic risk? Select one: A. Evaluating borrowers' creditworthiness B. Selling of loans to other organizations C. Diversifying the types of credits issued D. Diversifying the durations of credits issued

C. Selling of loans to other organizations

An acquisition target can try to make the acquisition more difficult by using what is collectively referred to as "shark repellents". Which one of the following best describes one of these "shark repellents"? Select one: A. Raising the price of the target company's stock to make it less affordable and more difficult for the raider to takeover. B. The acquisition target finding a friendly buyer that is more acceptable to the direction that the target wishes to take the company. C. Set up executive contract provisions to pay the executives a large severance, vest stock options and other benefits if any is terminated. D. Appeal to state regulators to disallow the raider to takeover and manage the acquisition target without regulatory hearings.

C. Set up executive contract provisions to pay the executives a large severance, vest stock options and other benefits if any is terminated.

Insurtech data capture is enabled primarily by Select one: A. Blockchain. B. Cryptocurrency. C. Smart products. D. Cloud computing.

C. Smart products.

Insurance regulators are concerned about an insurer's ability to meet its financial obligations as they come due, even those resulting from insured losses that may be claimed in the future. This ability to meet financial obligations is called Select one: A. Matching. B. Bankruptcy. C. Solvency. D. Reserving.

C. Solvency.

Stock X exhibits a standard deviation of 15.8 and an average rate of return of 8.9 percent. Stock Y exhibits a standard deviation of 28.6 and an average rate of return of 15.4 percent. Comparing the coefficient of variation of each stock suggests that Select one: A. Stock X will outperform Stock Y in the short-term market. B. Standard deviation would be a better measure of volatility between the two stocks. C. Stock Y is riskier than stock X. D. Stock X will outperform Stock Y in the long-term market.

C. Stock Y is riskier than stock X. Coefficient of variation is the standard deviation divided by the expected outcome (mean). For Stock X: 15.8/8.9=1.7865. For Stock Y: 28.6/15.4=1.8571. Stock Y has more variability, and is riskier than Stock X.

The efficient market hypothesis asserts that Select one: A. Stock prices are lower because of efficiencies in the securities markets. B. Stock prices are based on future expectations, and historical information is of little or no value. C. Stock prices reflect the expectations of all market participants, and no investor has superior knowledge D. Stock prices are a function of investors being able to take time to accurately analyze changes in market characteristics.

C. Stock prices reflect the expectations of all market participants, and no investor has superior knowledge

Which one of the following statements is true regarding swaps? Select one: A. Swaps are negotiated for indefinite time periods. B. Swaps decrease portfolio diversification. C. Swaps are commonly used to manage interest rate and currency rate of exchange risk. D. Parties to a swap pay all of the value and price upfront.

C. Swaps are commonly used to manage interest rate and currency rate of exchange risk.

Business reasons for acquisitions include both Select one: A. Economy of scope reducing products offered and allocational efficiency. B. Revenue efficiency and reduction in earnings per share. C. Technological efficiency and reduced cost of financial distress. D. Cost efficiency and reduction in shareholder equity.

C. Technological efficiency and reduced cost of financial distress.

The U.S. Securities and Exchange Commission (SEC) requires a publicly traded company to keep its shareholders informed. Which one of the following is the most likely way that companies meet this requirement? Select one: A. Changes in owner's equity statement B. The stockholders annual meeting C. The company annual financial report D. Financial information by business segment

C. The company annual financial report

If a company's inventory turnover ratio is higher than the industry benchmark, it indicates that Select one: A. Its inventory is becoming obsolete compared to that of its competitors. B. The company is holding its inventory longer than its competitors. C. The company is selling its inventory more quickly than its competitors. D. The company's inventory is generating higher costs than that of its competitors.

C. The company is selling its inventory more quickly than its competitors.

Anthony will deposit $2,000 in each of the next 10 years in a retirement savings account that pays eight percent annual interest. Deposits can be made on January 1st or on December 31st. Anthony should make the annual deposit on January 1st because Select one: A. Anthony will pay lower income taxes each year. B. Anthony can withdraw from the account one year earlier. C. The ending value of the account will be higher D. The interest rate will be compounded.

C. The ending value of the account will be higher

Cash matching provides a means of eliminating interest rate risk for an insurer by investing in bonds today to be able to pay for a large dollar obligation in the future . Which one of the following would be a significant limitation in the strategy of using this approach? Select one: A. The potential of an increase in interest rates that would devalue the investment for the payout. B. The purchased bonds may mature at unexpected dates making the cash available at improper times. C. The inability of being able to purchase zero-coupon bonds that will match the expected cash outflow. D. The insurer's underwriting portfolio may not be large enough to make cash matching practical.

C. The inability of being able to purchase zero-coupon bonds that will match the expected cash outflow.

An insurer's capacity is indicated by the comparison between Select one: A. The insurer's cash flow to its policyholder's surplus. B. The insurer's written premiums to its policy acquisition expenses. C. The insurer's written premiums to its policyholders' surplus. D. The insurer's investments to their value on the statutory balance sheet.

C. The insurer's written premiums to its policyholders' surplus.

Which one of these statements regarding the frequency of interest compounding is most correct? Select one: A. The higher the stated annual interest rate, the fewer the number of compounding periods per year. B. When interest is compounded more than once a year, the stated annual interest rate is reduced. C. The more frequently interest is compounded, the more quickly the investment principal increases.. D. The effective annual interest rate will normally be lower than the stated annual interest rate when interest is compounded more than once per year.

C. The more frequently interest is compounded, the more quickly the investment principal increases..

Whether a secondary market functions well depends on its market depth and breadth. Which one of the following best describes the market breath? Select one: A. The ability of the market to broadcast transaction to the public B. The ability of the market to handle large numbers of securities. C. The percentage of the overall market that is participating in the market. D. The range of security prices supported by the ups and downs of the market.

C. The percentage of the overall market that is participating in the market.

Which one of the following statements concerning convertible preferred stock is correct? Select one: A. Convertible preferred shares have a higher priority in the event of a bankruptcy than unsecured bonds, which tends to lower their coupon rates. B. Unlike the dividend payments on traditional preferred stock, the dividend payments on convertible preferred stock are tax deductible expenses for the issuing corporation. C. The price of convertible preferred shares should incease proportionately to the price of the common stock, but have less downside price risk than the common shares. D. Convertible preferred stock dividends are exempt from federal income taxes, although the owner may have to pay state or local income taxes on the dividends received.

C. The price of convertible preferred shares should incease proportionately to the price of the common stock, but have less downside price risk than the common shares.

An insurance company does not issue bonds but wants to determine its cost of debt created by writing insurance policies. The most appropriate way to determine the cost of debt is Select one: A. To use the expected cash flows of the policy to calculate an expected return. B. To use the expected cash flows of an equivalent risk bond to calculate an expected return. C. To match the duration of the reserves to bonds of equivalent risk. D. To match the duration of the reserves to riskier bonds to account for lack of liquidity.

C. To match the duration of the reserves to bonds of equivalent risk

Which one of the following is a short-term liability? Select one: A. Lease B. Mortgage C. Trade credit D. Bonds

C. Trade credit

Algot Insurance is a stable homeowners insurer with steady growth and profit over the last five years. The company is looking to enter the homeowners market in the coastal regions of the United States. Which one of the following categories of risk in the National Association of Insurance Commissioner's risk based capital (RBC) formula is most likely to be affected by Algot 's expansion decision? Select one: A. Asset risk B. Credit risk C. Underwriting risk D. Capital risk

C. Underwriting risk

Reinvestment risk is the uncertainty about the rate at which periodic interest payments can be reinvested. Which one of the following investments would have the lowest reinvestment risk? Select one: A. Commercial real estate B. High coupon corporate bonds C. Zero coupon Treasury bonds. D. Preferred stock

C. Zero coupon Treasury bonds.

Which statement describes the difference between capital markets and money markets? Capital markets involve electronic records while money markets involve paper securities. Capital markets involve institutions while money markets involve individuals. Capital markets trade in securities that mature in more than one year while money markets involve securities that mature in one year or less. Capital markets trade in securities while money markets trade currency.

Capital markets trade in securities that mature in more than one year while money markets involve securities that mature in one year or less.

Ming needs to calculate the present value of a stream of three unequal payments. The company will receive $100,000 at the end of year 1, $75,000 at the end of year 2, and $50,000 at the end of year 3. The interest rate is 6%. What is the present value of this stream of payments? Select one: A. $189,000 B. $196,575 C. $203,070 D. $212,175

Correct. (100,000 X .9434) + (75,000 X .8900) + (50,000 X .8396) = 203,070. The present value of this stream of payments $203,070.

Which one of the following important pieces of risk management information is found in the notes to the financial statement? Select one: A. A disclaimer of opinion B. An accounting equation C. Changes in owner's equity D. A summary of loss contingencies

D. A summary of loss contingencies

A type of acquisition in which both the target company and the buyer cease to exist is known as a: Proxy contest. Consolidation. Acquisition. Merger.

Consolidation.

A financial manager invests in a five-year ordinary annuity that has annual payments of $450 at an interest rate of 4 percent. The present value of this investment is Select one: A. $1,602.66. B. $1,633.45. C. $2,003.32. D. $2,362.50.

Correct. The present value of this investment is $2,003.32. PVA = A x PVF. $450 x 4.4518 (from PVA table) = $2,003.31. Alternately, determine factor using PFA formula: [1-[1÷(1+r)n)]÷r

ABC Industries' common size income statement for 20X1, 20X2 and 20X3 shows that the net profit margin is declining. Based on this table, what is the most likely cause of the decline? 20X120X220X3 Sales100.0%100.0%100.0% Cost of goods sold59.8%60.5%59.7% Gross profit40.2%39.5%40.3% Operating expenses19.3%19.4%19.2% Operating income20.9%20.2%21.2% Interest expense0.5%0.3%0.2% Income before taxes20.4%19.9%21.0% Income taxes3.0%5.1%7.3% Net income17.9%15.1%13.8% Select one: A. ABC's profits have decreased because of increases in the cost of its products. B. ABC's operating expenses are increasing at a faster rate than its sales. C. ABC's sales have been declining, leading to lower net income. D. ABC's profitability has declined because its income tax liability has been increasing.

D. ABC's profitability has declined because its income tax liability has been increasing.

Which one of the following is an example of a liquidity ratio? Select one: A. Debt-to-assets ratio B. Inventory turnover ratio C. Return on equity D. Acid-test ratio

D. Acid-test ratio

Insurance leverage relies on which one of the following to increase insurer returns? Select one: A. Temporary negative cash flows. B. Paid-in surplus. C. Underwriting gains. D. Additional average assets.

D. Additional average assets.

Which one of the following is used by A.M. Best to determine an insurer's financial size category (FSC) ? Select one: A. Written premium B. Earned premium C. Total operating earnings D. Adjusted surplus

D. Adjusted surplus

I.G. Bank is looking to acquire all of the stock of Grey Bank. I.G. Bank's ultimate goal is to have Grey Bank as a subsidiary. I.G. Bank's planned ownership or control of Grey bank is described as Select one: A. A consolidation. B. A spin-off. C. A merger. D. An acquisition.

D. An acquisition.

ABC's current investment portfolio of common stock is expected to earn a return of 14 percent this year, given that the risk-free rate of return is 5 percent and the expected return for the entire stock market is 15 percent. ABC is considering adding a new investment that has a beta of 0.8 to its existing portfolio. Assuming ABC makes that investment, it should expect investment returns Select one: A. And investment risk to both increase. B. To increase while investment risk decreases. C. To decrease while investment risk increases. D. And investment risk to both decrease.

D. And investment risk to both decrease. According to the CAPM formula, .14=(.05+[β(.15-.05)], the current portfolio has a beta of .9. The new investment's beta of 0.8 is lower than the current portfolio's beta so both risk and return should decrease

What is the financial theory behind stock price volatility? Select one: A. The marketplace is irrational, and anything can happen. B. Investors tend to focus primarily on the level of interest rates and ignore sound company fundamentals. C. Market prices, in general, are based on microeconomic factors rather than on macroeconomic factors. D. Any investment has a price that is equal to the discounted present value of the future cash flows it generates.

D. Any investment has a price that is equal to the discounted present value of the future cash flows it generates.

Which one of the following statements is true regarding the cost of financial distress? Select one: A. As the level of debt increases, the owners of the securities issued by the company will assume less risk since they will be protected in the event of bankruptcy. B. Once the cost of financial distress is greater than the earnings per share benefit, the value of the company will start to increase. C. At low levels of debt, the cost of financial distress is high. D. As the level of debt increases, the cost of financial distress increases until at some point it exceeds the earnings per share benefit from financial leverage.

D. As the level of debt increases, the cost of financial distress increases until at some point it exceeds the earnings per share benefit from financial leverage.

After a corporate acquisition, a tax advantage can occur because the amount of allowable depreciation increases reducing the income that the combined company must pay taxes on. For an acquisition with no net operating loss carryover, which one of the following best explains why there is an increase in the depreciation amount? Select one: A. The new company is able to start the depreciation process over. B. The tax code allows for an accelerated depreciation for mergers. C. The combined company has more physical assets to depreciate. D. Asset values are revalued to current values from historical values.

D. Asset values are revalued to current values from historical values.

Which one of the following is a reason an investor might prefer asset-backed securities to mortgage-backed securities? Select one: A. Asset-backed securities usually are collateralized with assets guaranteed by the U.S. government. B. Asset-backed securities are more likely to be debenture bonds. C. Asset-backed securities eliminate credit risk. D. Asset-backed securities usually have shorter maturities.

D. Asset-backed securities usually have shorter maturities.

The largest asset for many insurance companies is their investment in bonds. Under statutory accounting principles (SAP), how is a bond valued on an insurance company's balance sheet? Select one: A. At the bond's original purchase price B. At the bond's maturity value C. At the bond's maturity value less the sum of any interest payable from the bond D. At the bond's amortized cost

D. At the bond's amortized cost

Which one of the following is a (SEC) required section of an organization's annual financial report? Select one: A. Corporate message B. Financial highlights C. Letter to shareholders D. Auditor's report

D. Auditor's report

The use of telematics devices have greatly influenced ratemaking and risk management practices for which one of the following types of insurance? Select one: A. Life insurance B. Medical insurance C. Workers compensation insurance D. Auto insurance

D. Auto insurance

Which one of the following is a reason why underwriting operations do not have to generate an underwriting profit to provide insurance leverage? Select one: A. Because state regulations provide insurers with additional financial sources B. Because premiums charged can always be increased to policyholders C. Because insurer losses must be paid timely out of policyholder surplus D. Because of timing differences between cash receipts and revenue recognition

D. Because of timing differences between cash receipts and revenue recognition

The value of a bond on an insurer's balance sheet depends on the rating assigned to the bond by the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). Which one of the following statements about these ratings is true? Select one: A. Bonds are rated on a scale from one to ten with the highest rating being NAIC 10. B. Bonds with the highest credit rating are carried on insurer's balance sheets at their current market value. C. Bonds with the lowest credit rating are carried on insurer's balance sheets at the higher of amortized cost or the value of the bonds assigned to the bonds by the SVO. D. Bonds assigned a value by the SVO that is less than their amortized cost result in a reduction in an insurer's shareholders' equity.

D. Bonds assigned a value by the SVO that is less than their amortized cost result in a reduction in an insurer's shareholders' equity.

The value of a bond on an insurer's balance sheet depends on the rating assigned to the bond by the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC). Which one of the following statements about these ratings is true? Select one: A. Bonds that require an adjustment in the Capital and Surplus Account are rated lower by the SVO. B. Bonds with the highest SVO rating are carried on insurer's balance sheets at their current market value. C. Bonds with the lowest SVO rating are carried on insurer's balance sheets at amortized cost. D. Bonds revalued by the SVO at less than their amortized cost are reported as a capital loss in the Capital and Surplus Account.

D. Bonds revalued by the SVO at less than their amortized cost are reported as a capital loss in the Capital and Surplus Accoun

An insurer's liquidity depends on its Select one: A. Loss ratio. B. Investment results. C. Exposure to catastrophic losses. D. Cash inflows and outflows.

D. Cash inflows and outflows.

Bert Gregory is President of ABC Insurance Company. His company has been quite profitable, and Bert is looking to expand through acquisition. He is considering three acquisition targets. As part of his analysis of each company, Bert expressed each company's balance sheet entries as a percentage of the company's total assets, and each company's income statement values as a percentage of total revenues. The resulting financial statements, expressed as percentage values rather than dollar values, are called Select one: A. Trend analysis statements. B. Right-size financial statements. C. Projected financial statements. D. Common-size statements.

D. Common-size statements.

ABC Insurance Company recently purchased an illiquid, speculative bond with a $10,000 par value, a 12 percent coupon rate, and a five year maturity for $9,900. Even though the bond is not actively traded in the market, ABC can still estimate its fair value by Select one: A. Using the par value of the bond. B. Using the amortized value of the bond. C. Modeling the bond's historic cash flows. D. Comparing the bond to similar classes of investments that do have an observed market price.

D. Comparing the bond to similar classes of investments that do have an observed market price.

For financial institutions, which one of the following is an inherent exposure that only has a down side? Select one: A. Interest rate risk B. Market risk C. Pricing risk D. Credit risk

D. Credit risk

If bonds are backed simply by the general assets of the corporation, carrying no specific pledge of assets, they are referred to as Select one: A. Preferred stock. B. Secured bonds. C. Preferred bonds. D. Debentures.

D. Debentures.

Which one of the following best describes why it is important to analyze leverage ratios? Select one: A. Highly leveraged companies typically grow at a faster rate because they have more funds available to finance their expansion. B. Companies that are highly leveraged are not profitable because a large portion of their revenue is applied towards debt payments. C. Well-run companies should have low leverage and finance their operations by issuing shares. D. Debt obligations need to be repaid regardless of a company's profit, which can lead to decreased distributions to shareholders.

D. Debt obligations need to be repaid regardless of a company's profit, which can lead to decreased distributions to shareholders.

Sarbanes-Oxley prompted the SEC to issue interpretive guidance for improved disclosure in the management discussion and analysis (MD&A) report of an organization. Which one of the following is an area of guidance from Sarbanes-Oxley? Select one: A. Disclosure of liabilities at actual value B. Disclosure of all asset ownership C. Disclosure of the overall financial condition D. Disclosure of certain trading activities

D. Disclosure of certain trading activities

When evaluating an insurer's liquidity, analysts review projected cash outflows such as Select one: A. Rental income. B. Written premiums. C. Proceeds from the sale and maturity of investments. D. Dividends to policyholders and shareholders.

D. Dividends to policyholders and shareholders.

The primary difference between quick assets and current assets is that the quick assets Select one: A. Include cash. B. Do not include cash. C. Include inventory. D. Do not include inventory.

D. Do not include inventory.

Which one of the following events would be most likely to trigger an unusually high value outside of the normal range for the Investment Yield ratio? Select one: A. A downturn in the business cycle B. High investment expenses C. A high proportion of investments in cash D. Extraordinary dividend payments from a subsidiary

D. Extraordinary dividend payments from a subsidiary

Financial managers work to meet the needs of the organization and maximize shareholder value. When a business borrows money and invests it in the maintenance and growth of the company, the financial manager is attempting to use Select one: A. Liability financing. B. Borrowing tactics. C. Insurance leverage. D. Financial leverage.

D. Financial leverage.

Corporate acquisitions are sometime described according to the business nature of the companies. The merger between St. Paul Insurance Company and Travelers Insurance Company would be considered a Select one: A. Management acquisition. B. Vertical acquisition. C. Conglomerate acquisition. D. Horizontal acquisition.

D. Horizontal acquisition.

Investors in a company have a priority interest in the earnings of the company. From highest to lowest, which one of the following correctly orders the priority for a company distributing profits? Select one: A. Common stock dividends, preferred stock dividends, interest payments on bonds B. Preferred stock dividends, common stock dividends, interest payments on bonds C. Interest payments on bonds, common stock dividends, preferred stock dividends D. Interest payments on bonds, preferred stock dividends, common stock dividends

D. Interest payments on bonds, preferred stock dividends, common stock dividends

The price of bonds in the secondary market moves inversely with changes in Select one: A. Term structures. B. Exchange rates. C. New bond prices. D. Interest rates.

D. Interest rates.

Asset classes are organized into two broad categories on the balance sheet of the National Association of Insurance Commissioners (NAIC) Annual Statement. These are Select one: A. Cash and noncash assets. B. Securities and nonadmitted assets. C. Admitted assets and other assets. D. Invested assets and noninvested assets.

D. Invested assets and noninvested assets.

An underwriter is reviewing the financial statements for a prospective insured. She has determined that the insured's current ratio is higher than the benchmark average for companies comparable in size and operations, and that its acid-test ratio is lower than the benchmark average. The underwriter should request further information because these results indicate that the prospective insured Select one: A. Is collecting its receivables too frequently. B. Is carrying too much debt relative to its peers. C. Is not making efficient use of borrowing. D. Is carrying a higher level of inventory than its peers.

D. Is carrying a higher level of inventory than its peers.

Ready Insurance Company, listed on the NASDAQ stock exchange as RINS, writes insurance in the states of Florida, Louisiana, Alabama, Texas, Nevada, and California. Because Ready Insurance Company writes insurance in areas prone to catastrophes such as earthquakes and hurricanes, the company segments its business between earthquake-prone states and hurricane-prone states. Ready Insurance Company Select one: A. Chooses to disclose the business segment information through its 10-K report as it is a publicly traded company. B. Chooses to disclose the business segment information through its financial notes as it is a publicly traded company. C. Is required to disclose the business segment information through its 10-K report as it is a publicly traded company. D. Is required to disclose the business segment information through its financial notes as it is a publicly traded company.

D. Is required to disclose the business segment information through its financial notes as it is a publicly traded company.

To raise capital, corporations generally do which of the following? Select one: A. Retain profits from operations. B. Obtain investments from officers. C. Borrow from national banks. D. Issue and sell bonds or sell stock.

D. Issue and sell bonds or sell stock.

Financial managers decide how to raise and spend capital within a company. All of the following are common methods of raising capital, EXCEPT: Select one: A. Issuing preferred stock B. Issuing bonds C. Issuing common stock D. Issuing derivatives

D. Issuing derivatives

John is a strong believer in using technical analysis to manage his investment portfolio. He is concerned that his portfolio may not be ideally positioned for the next few months because it is heavily concentrated in common stocks of consumer retail companies like Keene Department Stores, Inc. and TVWorld Consumer Electronics. John believes that the economy will experience a spike in short-term interest rates over the next several months. Which one of the following actions would be consistent with John's belief in technical analysis? Select one: A. If he truly believes in the long-term soundness of his stock selections, John should stay with his current investment plan, rather than try to anticipate the future, and in the long-run, he will make money. B. John can project the long-run dividends for his portfolio based on his evaluation of how the stocks in his portfolio will act in the future and then use the discounted value of those stocks to guide his actions. C. Since John cannot accurately predict the future, he should shift his portfolio out of individual stocks and into a well balanced mutual fund that closely tracks a major stock index. D. John should gather historical price data to see how his current portfolio of stocks reacted in the past to similar changes in interest rates and then use those past patterns in stock prices to predict the future course of the stock prices.

D. John should gather historical price data to see how his current portfolio of stocks reacted in the past to similar changes in interest rates and then use those past patterns in stock prices to predict the future course of the stock prices.

John is risk-adverse and has a choice between investing $10,000 in a U.S. Government bond paying 4 percent or in a corporate common stock that is expected to pay 4 percent. Which one of the following is a correct statement regarding this choice? Select one: A. John would choose the corporate stock as large corporations are safer than the U.S. Government. B. John would choose the corporate stock as it can only go up in value and bond values stay the same. C. John would choose the government bond due to the chance that the bond will increase in value. D. John would choose the government bond due to less risk being involved for the same likely return.

D. John would choose the government bond due to less risk being involved for the same likely return.

The returns of Company A and Company B are uncorrelated, with each returning 8% with a standard deviation of 12%. An insurer that places $1,000,000 in Company A or Company B will earn $80,000 with a standard deviation of 12%. If instead the insurer places $500,000 in Company A and $500,000 in Company B, the return is $80,000 and the standard deviation is Select one: A. Greater than +12% B. Equal to -12% C. Equal to +12% D. Less than +12%

D. Less than +12% Because the investments' earnings do not move in unison (they are uncorrelated), and they have the same standard deviation (risk), the risk of a combined portfolio will always be less than either of the individual investments.

When acting as a financial intermediary, which one of the following types of financial institution deals primarily with long-term investments and liabilities? Select one: A. Commercial banks B. Property-casualty insurers C. Investment companies D. Life insurers

D. Life insurers

Which one of the following statements is true regarding an insurer's use of loss portfolio transfer? Select one: A. Loss portfolio transfers help transform insurable risk into investment risk. B. Loss portfolio transfers are typically used by insurers to reduce their risk of loss from catastrophes such as hurricanes and earthquakes. C. Loss portfolio transfers typically increase an insurer's need for capital under generally accepted accounting principles. D. Loss portfolio transfers are used more often as a way for an insurer to withdraw from a segment of business than as a source of capital.

D. Loss portfolio transfers are used more often as a way for an insurer to withdraw from a segment of business than as a source of capita

There is an accounting rule that requires revenues to be offset by the expenses incurred to generate the revenues. This accounting rule is called the Select one: A. Accounting equation. B. Market value rule. C. Risk-based capital standard. D. Matching principle.

D. Matching principle.

Money markets trade in securities that Select one: A. Must be marketed to achieve maturity. B. Have built-in maturity. C. Mature in more than one year. D. Mature in one year or less.

D. Mature in one year or less.

How is the value of an insurer's reputation typically reflected on its balance sheet? Select one: A. Goodwill B. Treasury stock value C. Excess of fair market value D. Not recorded

D. Not recorded

The formulas for calculating future and present value rely on several common variables. One of these common variables is the Select one: A. Annuitized value of interest. B. Discounted value of the interest rate. C. Expected value of the investment at maturity. D. Number of times per year interest is paid.

D. Number of times per year interest is paid.

Which one of the following best explains the difference between trading securities on an exchange (NYSE) versus over the counter (OTC)? Select one: A. One is for primary and one is for secondary markets. B. OTC stocks are much riskier than exchange stocks. C. Those on exchanges trade for higher values. D. OTC stocks are not listed on any exchange.

D. OTC stocks are not listed on any exchange.

If an insurer shows a wide variance in the Change in Net Premiums Written ratio, that is an indication that the insurer's Select one: A. Profitability is inadequate. B. Growth rate is higher than the industry average. C. Policy count has increased for the year. D. Operations may be unstable.

D. Operations may be unstable.

Primary markets are mechanisms used to sell new securities, with the proceeds going to the security issuer. Which one of the following would be considered a direct search primary-market structure? Select one: A. Transacting against orders through a central intermediary B. Dealers holding themselves out as willing to buy or sell C. Agents conducting a search for buyers or sellers D. Participants finding buyers or sellers by themselves

D. Participants finding buyers or sellers by themselves

Which one of the following types of asset exposes an organization to the greatest liquidity risk? Select one: A. Publicly traded stocks B. Cash C. Publicly traded bonds D. Real estate

D. Real estate

Van Financial is a recently organized corporation that is attempting to solidify its dividend policy. Currently, the market is very unstable and uncertain. Over the past year the capital gains tax has drastically increased. Van also has concerns regarding their ability to raise equity capital as a newly created corporation. In creating their dividend policy, Van is most likely to Select one: A. Distribute dividends to shareholders to generate higher market share for Van stock. B. Distribute dividends to shareholders due to federal law. C. Repurchase its corporate stock to improve financial flexibility. D. Retain its corporate earnings for its own investment.

D. Retain its corporate earnings for its own investment.

For the typical insurance company, the largest part of its policyholders' surplus comes from its Select one: A. Risk-based capital. B. Contributed capital. C. Common stock and paid in capital. D. Retained earnings.

D. Retained earnings.

Reasons organizations make acquisitions include, but are not limited to Select one: A. Revenue efficiencies, increased earnings per share, and increased security issuance costs. B. Economies of scale, economies of scope, and the preservation of excess funds. C. Cost efficiencies, organization scale that incentivizes monitoring by shareholders, and economies of scope. D. Revenue efficiencies, the tax basis of depreciable assets, and economies of scale.

D. Revenue efficiencies, the tax basis of depreciable assets, and economies of scale.

FASB's ACS Topic 820, "Fair Value Measurements and Disclosures" provides guidance on fair value reporting of financial instruments that have little or no market activity. One approach that can be used for Level 3 valuation of these financial assets is to use Select one: A. Historical cost as the reporting basis. B. Off-balance sheet accounting to remove those assets from the financial statements. C. Valuations based on the average value of the thirty publicly traded stocks in the Dow Jones Industrial Averages. D. Simulation and internal modeling of expected future cash flows.

D. Simulation and internal modeling of expected future cash flows.

One of the primary reasons that growth places a strain on an insurer's policyholders' surplus is that Select one: A. Premium tax payments are made immediately when the policies are written. B. Insurers are forced to hire additional workers to service the growth. C. Loss payments begin almost immediately. D. Statutory accounting requires the immediate recognition of all policy acquisition expenses.

D. Statutory accounting requires the immediate recognition of all policy acquisition expenses.

The total economic gain from an acquisition is determined by Select one: A. Adding the value of the target before the acquisition to the value of the acquiring firm before the acquisition. B. Subtracting the value of the combined firm after the acquisition from the total value of both the acquiring firm and the target firm prior to the acquisition. C. Adding the value of the acquiring firm before the acquisition to the value of the acquiring firm after the acquisition. D. Subtracting the before-acquisition values of the acquiring firm and the target firm from the value of the combined firm after the acquisition.

D. Subtracting the before-acquisition values of the acquiring firm and the target firm from the value of the combined firm after the acquisition.

When property-casualty insurers act as financial intermediaries, which one of the following is the role of the policyholder? Select one: A. Security B. User of funds C. Borrower D. Supplier of funds

D. Supplier of funds

Which one of the following is the main method mutual insurers use to raise surplus or equity? Select one: A. Equity capital B. Bonds C. Reinsurance ceding commissions D. Surplus notes

D. Surplus notes

A "shark repellent," such as staggering the terms of company board members, is otherwise known as a Select one: A. Super majority. B. Targeted repurchase. C. White knight. D. Takeover defense.

D. Takeover defense.

A.M. Best's financial strength ratings may be accompanied by one or more modifiers, indicated by lowercase letters. The modifier r indicates which one of the following? Select one: A. That the rating is under review B. That the rating includes consideration of regulatory risks C. That the rating applies to the lead rating unit only D. That the rating includes consideration of reinsurance

D. That the rating includes consideration of reinsurance

Which one of the following is true regarding the role of a special purpose vehicle (SPV) in an insurance securitization transaction? Select one: A. A SPV is not considered an authorized insurer, so the transfer of the risk of loss cannot be treated as insurance for tax purposes. B. SPVs are a popular form of securitization for insurers because of the lack of regulatory requirements. C. A SPV's only obligation is to repay interest and principal on the insurance-linked securities. D. The SPV receives cash from both the investors and the organization that transfers the insurable risk.

D. The SPV receives cash from both the investors and the organization that transfers the insurable risk.

An analyst for ABC Manufacturing Company has been asked by the management team to perform a study of its financial health relative to that of its competitors. ABC's industry segment has a trade organization that publishes average industry ratios for various financial measures. A review of these published ratios as compared to ABC's ratios will allow the analyst to determine Select one: A. The relative importance of each ratio for its industry. B. The level at which each ratio is too high or too low for its industry. C. The most important indicator of financial health for its industry. D. The areas of the company's operation that may need further review.

D. The areas of the company's operation that may need further review.

Which one of the following situations would be most likely to cause the market price of a firm's outstanding bonds to increase? Select one: A. The firm's bond rating decreases. B. The liquidity premium associated with the firm's bonds increases. C. The maturity risk premium for bonds with the same maturity increases D. The average rate of inflation in the economy decreases.

D. The average rate of inflation in the economy decreases.

Which one of the following statements about revenue bonds is true? Select one: A. They are repayable from the general revenues of issuing authorities. B. They have coupon payments that are subject to higher federal income tax rates than are coupon payments of corporate bonds. C. They are often issued by insurance companies. D. They tend to have higher yields than general obligation bonds because of a higher level of risk.

D. They tend to have higher yields than general obligation bonds because of a higher level of risk.

The rules of a state lottery specify that the winner of the grand prize jackpot must elect either the annuity option or the cash option to specify how they will receive their winnings. Under the annuity option, the jackpot is divided into 30 equal annual payments, with the first payment being made immediately. Under the cash option, the winner receives the discounted value of the 30 annuity payments, using the rate that the U.S. Treasury pays on medium term loans as the discount rate. The determination of the dollar amount of the cash option is an example of Select one: A. The computation of the present value of an ordinary annuity. B. The computation of the future value of an annuity due. C. The computation of the future value of an ordinary annuity. D. The computation of the present value of an annuity due.

D. The computation of the present value of an annuity due.

Financial leverage analysis provides a portrayal of revenue and expenses under various circumstances. This analysis is a technique used for comparing Select one: A. Earnings per share under alternative capitalization plans. B. Common stock values at various levels of borrowing. C. The purchase of bonds verses the purchase of stock. D. The cost of various levels of debt to the corporation.

D. The cost of various levels of debt to the corporation.

There are two important characteristics of bond duration. Which one of the following is a correct one of these characteristics? Select one: A. The duration of the underwriting and investment portfolios can never be matched. B. The duration of a bond that pays interest over its life will aways be more than its time to maturity. C. The duration of bonds give investment managers a way to compare only bonds with similar maturities. D. The duration of a zero-coupon bond is always equal to its time to maturity.

D. The duration of a zero-coupon bond is always equal to its time to maturity.

ABC Company purchased a building in Manhattan in 1935. There is no mortgage on the property. Which one of the following statements best describes a limitation of the financial statements when evaluating ABC's financial position? Select one: A. The original mortgage may be reported on the financial statements. B. The financial statements report the building as fully depreciated. C. The location of the building may not be disclosed. D. The fair value of the building may be much higher than cost.

D. The fair value of the building may be much higher than cost.

While performing vertical analysis on a firm's income statement, an analyst noted that the gross profit margin had declined. Which one of the following situations would explain this occurrence? Select one: A. The firm is selling fewer items than before.I B. The firm has reduced its cost of merchandise sold relative to its prices. C. The firm has increased its prices relative to its cost of merchandise sold. D. The firm has reduced its prices relative to the cost of merchercandise sold.

D. The firm has reduced its prices relative to the cost of merchercandise sold.

Lightning Electric, Inc., experienced a five year period of rapid sales growth. Which one of the following statements best describes a conclusion of common-size financial statement analysis that indicates Lightning's success in managing the rapid sales growth with respect to profitability? Select one: A. The inventory value has fallen over the five year period. B. Short-term debt has been consistent over the five year period. C. Cost of goods sold has increased over the five year period. D. The gross profit margin has been consistent over the five year period.

D. The gross profit margin has been consistent over the five year period.

While generally accepted accounting principles (GAAP) counts all assets, statutory accounting principles (SAP) excludes some assets (nonadmitted assets) that cannot be readily converted to cash when determining solvency. Which one of the following assets would be counted (admitted) under SAP? Select one: A. The insurer's mailroom equipment B. Autos owned by the insurer C. Prepaid expenses D. The insurer's home office building

D. The insurer's home office building

For the potential buyer of an existing company to have an economic incentive to meet the acquisition asking price, Select one: A. Cash rather than stock should be used to finance the acquisition. B. The present value of the incremental cash flow must be the same for the buyer and seller. C. The price should be more than the value of the target as a separate entity and the economic gain. D. The price must not exceed the value of the target as a separate entity by more than the economic gain.

D. The price must not exceed the value of the target as a separate entity by more than the economic gain.

Insurance leverage is analogous to financial leverage used by firms that borrow funds by issuing traditional debt. Insurance leverage is measured by Select one: A. The number of shares of stock to outstanding reserves. B. Policyholders' surplus to outstanding shares of stock. C. The amount of outstanding debt to owners' equity. D. The ratio of reserves to policyholders' surplus.

D. The ratio of reserves to policyholders' surplus.

For an acquisition to make economic sense, there must be a resulting economic gain. Which one of the following is true if the acquisition price exceeds the individual value of the target by more than the economic gain? Select one: A. The acquisition will be disallowed by the state regulators. B. The acquiring company will increase the offer to the target owners. C. The targeted company stockholders will receive a lower price. D. There will be no financial incentive to make the acquisition.

D. There will be no financial incentive to make the acquisition.

Insurer management must be aware of what the cost of capital is to their company. When multiple sources of capital such as debt, equity, or preferred stock are used how would the insurer best calculate their cost of capital? Select one: A. They should measure the opportunity cost of the source of funds. B. They should use the lowest source cost available to them. C. They should use the cost of the most expensive source used. D. They should use a weighted average of the cost of all sources.

D. They should use a weighted average of the cost of all sources.

Unity Insurance Company (UIC) has an operating ratio of 0.98, a combined ratio of 1.02, and a loss ratio of 0.77. Considering these ratios, which one of the following statements is true for UIC? Select one: A. UIC's favorable financial basis expense ratio is offsetting losses, allowing an underwriting profit. B. UIC is collecting enough premium to allow a profit from its underwriting operations. C. UIC is collecting enough premium exclusive of investment income to allow an operating profit. D. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.

D. UIC's investment income is offsetting losses and expenses from its underwriting operation, allowing an operating profit.

As a component of insurer income, other income consists of revenues and expenses that are not related to income from either Select one: A. Assets or liabilities amounts. B. Cash flow or cash losses. C. Balance sheet or income statements. D. Underwriting or investment activities.

D. Underwriting or investment activities.

Which one of the following is a measure of the loss uncertainty of the insurance sold by an insurer? Select one: A. Asset risk. B. Credit risk. C. Off-balance sheet risk. D. Underwriting risk.

D. Underwriting risk.

Corporation X wants to improve its financial position. The corporation could Select one: A. Sell some of its previously-issued shares through the primary market as those shares tend to sell more quickly than through the secondary markets. B. Sell new shares in the corporation through the secondary market as it does not want the transactions to be public at this time. C. Use a dealer in the primary market to buy back Corporation X's previously issued securities at a reduced rate since cash on hand is low. D. Use a broker in the primary market to sell new securities to generate additional cash for the corporation.

D. Use a broker in the primary market to sell new securities to generate additional cash for the corporation.

Trend analysis Select one: A. Can be used to compare balance sheet values over time, but cannot be used to analyze income statement values. B. Compares ratios for companies in the same sector of the economy at any point in time. C. Is a more in-depth form of analysis of financial statement values than is ratio analysis. D. Uses period-to-period percentage changes to identify patterns and to highlight changes in financial statement items over time.

D. Uses period-to-period percentage changes to identify patterns and to highlight changes in financial statement items over time.

The portfolio manager of a property-casualty insurance company would like to invest some of the company's money in pharmaceutical company common stock. As part of her analysis, she converted the financial statements of several drug companies to common-size statements, and she looked for unusual percentages and significant differences from industry averages. The analysis this portfolio manager performed is called Select one: A. Capital analysis. B. Trend analysis. C. Ratio analysis. D. Vertical analysis.

D. Vertical analysis.

Under GAAP accounting, bonds are recorded on the balance sheet at either their amortized cost or their fair (market) value. Which one of the following best explains the reason for choosing either one of these methods of recording the bond value? Select one: A. What the term to expiration of the bond is. B. Whether it is U.S. debt or a corporate security. C. What the assigned risk level of the bond is. D. Whether the bond is a held-to-maturity security.

D. Whether the bond is a held-to-maturity security

Floating-rate bonds are most popular with issuers when interest rates are expected to: Increase. Decrease. Stay the same. Be volatile.

Decrease.

The stated interest rate: Is always higher than the effective annual interest rate. Does not take into account the frequency of compounding. Produces a higher rate of return than compound interest. Is the rate of interest that reflects the effect of compounding more than once a year.

Does not take into account the frequency of compounding.

The results of which one of the following reserve test ratios may be adversely affected by significant changes in premium volume or by shifts in product mix between short-tailed and long-tailed lines? Estimated Current Reserve Deficiency to Policyholders' Surplus ratio Investment Yield ratio Two-Year Reserve Development to Policyholders' Surplus ratio One-Year Reserve Development to Policyholders' Surplus ratio

Estimated Current Reserve Deficiency to Policyholders' Surplus ratio

Municipal bonds are attractive to investors because they are: Guaranteed for no risk of default. Guaranteed to increase in value. Considered lower risk than general obligation bonds. Exempt from federal taxes and may also be exempt from state and local taxes.

Exempt from federal taxes and may also be exempt from state and local taxes.

A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price is a Select one: A. Insurance option. B. Forward contract. C. Call option D. Swap.

Forward Contract

An invested asset is usually considered permanently impaired when Its price declines 5 percent. It does not pay dividends for a quarter. Its fair value is 5 percent less than its carrying value for twelve months. It is sold for less than its purchase price.

Its fair value is 5 percent less than its carrying value for twelve months.

Investor A holds an investment portfolio comprised solely of bonds while Investor B's portfolio consists solely of stocks. While both investors share certain investments related financial risks, to which one of the following does Investor A have a greater exposure? Select one: A. Market risk B. Liquidity risk C. Interest rate risk D. Credit risk

Interest Rate Risk

Current assets include Select one: A. Equipment. B. Patents. C. Leaseholds. D. Inventory.

Inventory

When two companies with debt combine, the debt of the newly-formed company usually: Is more valuable than the sum of the debt values when the two companies were separate. Is less valuable than the sum of the debt values when the two companies were separate. Is equal in value to the sum of the debt values when the two companies were separate. Has no consistent relation to the sum of the debt values when the two companies were separate.

Is more valuable than the sum of the debt values when the two companies were separate.

Liquidity ratios such as the acid-test ratio and the current ratio measure a company's ability to convert assets to cash in order to satisfy its obligations. The acid-test ratio is a more conservative measure of liquidity because Select one: A. It does not include cash as an asset. B. It considers only current liabilities. C. It assumes that inventory will sell very quickly. D. It does not include inventory as an asset.

It does not include inventory as an asset.

Capital structure is a corporation's mix of: Common stock issued and all debt. Common and preferred stock issued and all debt. Short-term debt and equity. Long-term debt and equity.

Long-term debt and equity.

An insurer that invests in stocks and bonds faces the risk that its investment portfolio loses value while its liabilities remain the same. Which one of the following types of risk does this illustrate? Select one: A. Liquidity risk B. Market risk C. Interest rate risk D. Pricing risk

Market risk

Which one of the following terms is used for the difference in yield for different maturities of a bond category. Real rate of return Maturity premium Liquidity premium Credit risk

Maturity premium

If a dividend on a noncumulative preferred stock is not declared in any particular year: The accrued dividend is held until the stockholder requests payment. The accrued dividend is carried forward to the following year. No accrued dividend is carried forward, and it is therefore not necessary to pay these unpaid dividends before paying dividends on common stock in a following year. No accrued dividend is carried forward, and dividends on common stock are held as a result.

No accrued dividend is carried forward, and it is therefore not necessary to pay these unpaid dividends before paying dividends on common stock in a following year.

In a soft market, insurers try to hold on to market share even though the prevailing rates may be inadequate. This is an example of which one of the following types of risk that insurers may face? Select one: A. Market risk B. Liquidity risk C. Credit risk D. Pricing risk

Pricing Risk

To compare the success of two different companies through vertical analysis, Select one: A. It is necessary to construct common size statements for each corporation and then look for any unusual percentages for the same accounting period. B. It would not be possible to analyze interim period results, only annual results for these corporations. C. It does not matter what a corporation's business strategy is when analyzing vertical data for comparisons. D. It is important to address how much individual statement items have changed over the period considered.

Select one: A. It is necessary to construct common size statements for each corporation and then look for any unusual percentages for the same accounting period.

The most important objective of bond portfolio management is: Diversifying holdings to minimize interest rate risk. Structuring the portfolio so that investment cash inflows match expected cash outflows. Eliminating default risk to make investments secure. Determining the correct risk premium to offset the credit risk of the securities in the portfolio.

Structuring the portfolio so that investment cash inflows match expected cash outflows.

Stock insurers generate additional capital to operate and expand their business through all of these, EXCEPT: Retained earnings Selling additional stock Surplus contributions from policyholders Borrowed funds

Surplus contributions from policyholders

The approach to stock pricing that tries to detect patterns in past prices is: Fundamental analysis. Technical analysis. Financial theory. Efficient market hypothesis.

Technical analysis

A low standard deviation indicates That the data points are usually very close to the mean. That the data points are usually spread out. That the variables being assessed belong to a known probability distribution. That variability of the data points relative to the square root of variance is low.

That the data points are usually very close to the mean.

capacity

The amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus.

An insurer's economic capital is Identical to its risk-based capital (RBC). The amount of capital required to maintain solvency at a given risk tolerance level. The fair value of its assets. Reserves discounted to present value plus a market value margin.

The amount of capital required to maintain solvency at a given risk tolerance level.

retained earnings

The cumulative net income that an organization has retained, after payment of dividends, for reinvestment in the organization's operations.

The discounted cash flow model (DCF) values an asset as: The last annual dividend. The current share price. The present value of future cash flows in perpetuity. The expected annual growth rate of the dividend in perpetuity.

The present value of future cash flows in perpetuity.

All of these factors determine an investment's rate of return, EXCEPT: The rate at which the invested amount will grow. The sum initially invested. The length of time over which it will grow.

The sum initially invested.

Robin has decided to contribute $10,000 to her retirement account at the end of each year. If the account pays 8 percent interest, what will be the value of the account at the end of five years? Select one: A. $54,000 B. $54,064 C. $58,666 D. $73.464

The value of the account at the end of five years is $58,666. FVA=A x FVAF. $10,000 x 5.8666 (from the FVA table) = $58,666. Alternately, use the FVAF formula to determine the factor: [(1+r)n)-1]÷r

One year ago, Stan borrowed $10,000 from Susan and agreed to pay the entire amount back today. However, Stan told Susan that he was short of funds and offered to pay her $5,000 immediately and another $5,500 in one year. If Susan's required rate of return is eight percent, the total value today of these two payments is Select one: A. $10,093. B. $10,500. C. $10,800. D. $11,232.

The value today of the two payments is $10,093. Using the PV factor, add the present values of the two payments: ($5,000 now X 1=$5,000)+($5,500 next year x .9259 (1/1.08)=$5,093)=$10,093

Calculating the fair value of an insurer is complicated because The insurer's liabilities are shown on the balance sheet as discounted estimates of future payments. There is no readily available market for loss reserves or unearned premium reserves, an insurer's largest liabilities. The insurer's liabilities may not be shown on the balance sheet of the insurer because they are strictly estimates. The market value surplus has no adjustment for risk that is inherent in the cash flows arising from assets and liabilities.

There is no readily available market for loss reserves or unearned premium reserves, an insurer's largest liabilities.

In financial statement analysis, what term refers to cash as well as short-term securities that can easily be converted to cash? Select one: A. Leverage B. Liquidity C. Capital adequacy D. Profitability

liquiduty

Working capital

A liquidity measure that is calculated by subtracting current liabilities from current assets. It is used to determine a company's ability to finance immediate operations (to buy inventory, finance growth, and obtain credit). current assets-current liabilities

comprehensive income

A measure of income that goes beyond that reported on the income statement by including items such as unrealized gains and losses.

The basic accounting equation on which the balance sheet is structured is Select one: A. Assets = Liabilities + Net Worth B. Liabilities = Assets + Net Worth C. Net Worth = Liabilities + Assets D. Assets = Liabilities - Net Worth

A. Assets = Liabilities + Net Worth

current assets

A balance sheet asset classification that includes cash and other assets that are expected to be converted into cash, sold, or exchanged within the business's normal operating cycle, usually one year.

Sarbanes- Oxley Act of 2002

A federal statutory law governing corporate directors in the areas of investor protection, internal controls, and penalties, both civil and criminal.

On an insurer's balance sheet, incurred but not reported (IBNR) losses are Select one: A. A past current asset. B. A long-term liability. C. A category of reserves. D. Not reported

C. A category of reserves.

Why is it so important for a corporation to adopt a code of ethics? Select one: A. A code of ethics allows corporate decisions to be reported on favorably by the news media. B. A code of ethics ensures compliance with laws and regulations.Incorrect. A code of ethics provides a means of actively managing ethics in the workplace. C. A code of ethics provides a means of actively managing ethics in the workplace. D. A code of ethics clarifies what is ethical to employees.

C. A code of ethics provides a means of actively managing ethics in the workplace.

A firm records revenues and expenses as they are incurred. This is called Select one: A. Going concern accounting. B. Tax basis accounting. C. Accrual basis accounting. D. Cash basis accounting.

C. Accrual basis accounting.

Insurer, Inc., issued 10,000 shares of stock with a par value of $0.10 a share at $15 a share. What is represented by the following calculation? (10,000 x $15) minus (10,000 x $0.10) equals $149,000 Select one: A. Dividends B. Par value C. Additional paid-in capital D. Retained earnings

C. Additional paid-in capital

The balance sheet provides a snapshot of an organization's financial condition Select one: A. For at least two points in time for comparison purposes. B. Over one 12 month period. C. At a given point in time D. At the start and end of a business day.

C. At a given point in time

When the books of a business show the value of property at its depreciated value rather than its purchase price, this is an illustration of the generally accepted accounting principle (GAAP) of Select one: A. Monetary. B. Materiality. C. Conservatism D. Cost.

C. Conservatism.

Working capital is Select one: A. Current liabilities minus current assets. B. Current liabilities divided by current assets. C. Current assets minus current liabilities. D. Current assets times current liabilities.

C. Current assets minus current liabilities.

An insurance claim representative might likely use information contained in the insured's financial statements to Select one: A. Determine fault after the injury to a customer. B. Determine the cost to repair a building after a fire. C. Determine if a moral hazard exists after a fire loss.Correct. They would want to determine if a moral hazard exists after a fire loss. D. Determine if coverage exists for a damaged auto.

C. Determine if a moral hazard exists after a fire loss.

The measurement of the economic income of an organization differs from the measurement of the organization's accounting income. Which one of the following would be true regarding this difference? Select one: A. Economic income depends on income measurement rules rather than accounting principles. B. Economic income recognizes expenses evenly over the period rather than when incurred. C. Economic income is based on fair market value rather than historical value. D. Economic income is the net value of the goods and services rather than the change in net worth.

C. Economic income is based on fair market value rather than historical value.

In the third quarter of 2008, an influenza epidemic increased demand for the flu vaccine. Mark Pharmaceuticals, a company that stocks the vaccine, saw the value of its vaccine supply increase from $36 million to $50 million. This increase of $14 million represents an increase in Select one: A. Accounting income. B. Statutory income. C. Economic income. D. GAAP income.

C. Economic income.

Which one of the following is a consequence of focusing on the maximization of profits? Select one: A. Optimizing the return to shareholders for the use of their capital B. Recognizing the effects of risk, dividends, and the value of the stock C. Electing accounting treatments that make financial statements less useful to potential investorsCorrect. A consequence of focusing on the maximization of profits is electing accounting treatments that make financial statements less useful to potential investors. D. Focusing on long-term growth and profitability to the detriment of current profits

C. Electing accounting treatments that make financial statements less useful to potential investors

Which one of the following statements best describes an asset category on an insurer's balance sheet? Select one: A. Deferred policy acquisition costs are reported as short-term liabilities. B. Short-term investments are assets reported at amortized value. C. Equity investments are assets reported at fair value. D. Fixed maturity investments are assets reported at cost plus accrued interest.

C. Equity investments are assets reported at fair value.

Which one of the following statements is true? Select one: A. An insurer's capacity is unaffected by investment results. B. Generally accepted accounting principles (GAAP) require insurers to carry common stock on the balance sheet at market value. C. Fair value leads to values that are consistent with economic income. D. An insurer's capacity is unaffected by underwriting gains and losses.

C. Fair value leads to values that are consistent with economic income.

Activity within the financial markets is important to corporations. The capital market is significant because it Select one: A. Provides information for accounting statements. B. Dictates the assets needed to support the cost of capital. C. Generally determines the cost of long-term financing. D. Determines the amount of capital available through borrowing.

C. Generally determines the cost of long-term financing.

Which one of the following statements about the balance sheet is correct? Select one: A. The balance sheet must always balance, but an exception is that the balance sheet will not balance if net worth is a negative number. B. The balance sheet contains important financial information about net worth and assets, both which indicate the source of an organization's funding. C. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets. D. Change in asset and liability valuation from historical cost to fair value has no effect on the value of shareholders' equity.

C. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.

Sarbanes-Oxley requires the principal executive officer and the principal financial officer to certify the accuracy of which financial reports? Select one: A. Bi-monthly and annual B. Monthly and quarterly C. Quarterly and annualCorrect. Sarbanes-Oxley requires the principal executive officer and the principal financial officer to certify the accuracy of quarterly and annual financial reports. D. Semi-quarterly and annual

C. Quarterly and annual

Owners' equity represents the capital contributed by an organization's owners plus the organization's Select one: A. Treasury stock. B. Net worth. C. Retained earnings. D. Net assets.

C. Retained earnings.

The four primary types of financial statements include the balance sheet, the income statement, the statement of changes in shareholders' equity, and the Select one: A. Audited statement. B. Profit and loss statement. C. Statement of cash flows. D. Summary of operations.

C. Statement of cash flows.

The four primary types of financial statements include the balance sheet, the income statement, the statement of cash flows, and the Select one: A. Statement of retained earnings. B. Schedule of contingencies. C. Statement of changes in shareholders' equity. D. Summary of accounting policies.

C. Statement of changes in shareholders' equity.

Which one of the following best describes the result of the four major financial statements all taken together? Select one: A. The status of the organization as an ongoing concern B. The impact that the business has had on the price of the stock C. The financial condition of the organization D. The total net worth of the organization at that time period

C. The financial condition of the organization

The purchase of a building is a capital expenditure. How is the purchase recorded on the income statement? Select one: A. Capital expenditures are reported on the cash flow statement as an operating activity. B. The purchase is expensed over the number of years of the related financing agreement. C. The purchase price is expensed over the building's life expectancy. D. The purchase price is an expense on the closing date of the sale.

C. The purchase price is expensed over the building's life expectancy.

A principal liability of insurers is the unearned premium reserve. Which one of the following statements best describes the unearned premium reserve? Select one: A. The unearned premium reserve accounts for policies that are paid in installments. B. The unearned premium reserve represents losses that may occur in more than twelve months. C. The unearned premium reserve represents premiums paid but not yet earned. D. The unearned premium accounts for policy cancellation premiums.

C. The unearned premium reserve represents premiums paid but not yet earned.

Which one of the following is a function of the corporate finance department? Select one: A. To establish the overall structure of the corporation B. To oversee corporate product and project management C. To ensure that appropriate capital is allocated to projects D. To provide reporting to the chief information officer

C. To ensure that appropriate capital is allocated to projects

One of the generally accepted accounting principles (GAAP) is the conservatism principle, which requires Select one: A. Expenses incurred in generating revenues to be matched against those revenues. B. An organization to use the same accounting principles and reporting practices in every accounting period. C. Transactions to be recorded in a manner such that that assets and earnings are not overstated. D. An organization's assets to be recorded at their purchase price or production price.

C. Transactions to be recorded in a manner such that that assets and earnings are not overstated.

Generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) have similar ways of Reporting for many assets, such as using fair value reporting for derivatives. Reporting the value of property, plant, and equipment assets. Recognizing revenue. Valuing insurer liabilities.

Reporting for many assets, such as using fair value reporting for derivatives.

One of the purposes of this section of the statement of changes in shareholders' equity is to connect the income statement to the balance sheet by indicating how much of the net income of the company is being reinvested for ongoing and future business needs rather than distributed to the owners in the form of dividends. What section is described? Treasury stock Paid-in capital Accumulated other comprehensive income Retained earnings

Retained earnings

gross margin

The percentage of sales remaining after deducting the cost of goods sold from sales, calculated by dividing gross profit by sales.

All of the following are unique types of insurer assets, EXCEPT: Unearned premium Premium receivables Deferred policy acquisition costs Reinsurance recoverables

Unearned premium

Finance

Which one of the following is described as a discipline concerned with determining value and making decisions about money, banking, credit, investments, and other assets?