Insurance and Risk Management Online MCQ Set 5

QN01. A central bank wishes to indicate that its official interest rate will be 4.5% from tomorrow. What repurchase price should it set for 28 day repo deals in government bonds valued at £1m?

  1. £1,045,000
  2. £1,003,452
  3. £1,003,000
  4. £1,002,000
  5. £955,000
Answer

(B)£1,003,452

QN02. A company has just declared a dividend of 8p per share on shares current valued at £1.50. Dividends have been growing steadily at 5 per cent p.a. The dividend yield on these shares is is:

  1. 5.6%
  2. 5.3%
  3. 13%
  4. 10.6%
  5. 10.3%
Answer

(B)5.3%

QN03. A corporate bond paying an annual coupon of £9 matures for £100 on 30 September 2011. What is its price on 1 October 2008 if interest rates are 8.5 per cent?

  1. £102.56
  2. £61.29
  3. £101.28
  4. £101.97
  5. £102.26
Answer

(C)£101.28

QN04. A downward sloping yield curve most likely indicates:

  1. The central bank has restricted short-term borrowing
  2. Low prices for long-dated bonds
  3. Investors have become capital risk averse
  4. Markets expect short-term rates to fall
  5. A strong demand for short-dated assets
Answer

(B)Low prices for long-dated bonds

QN05. A firm announces that its next dividend payment will be 12p per share. The shares are currently priced at £1. The firm's earnings have recently grown at a rate of 9 per cent per year and this is expected to continue. The total annual return on these shares is:

  1. 21%
  2. 15%
  3. 9%
  4. 3%
  5. 12%
Answer

(A)21%

QN06. A government sale of treasury bills to the central bank is the nearest thing in a modern economy to:

  1. Financing a government deficit
  2. Reducing the national debt
  3. Increasing the national debt
  4. Printing money
  5. Reducing liquidity
Answer

(A)Financing a government deficit

QN07. A mutual fund manager shifts part of his portfolio from long-dated bonds to money market instruments even though yields are unchanged. Most likely he is expecting:

  1. A fall in the rate of inflation
  2. A reduction in the riskiness of bonds
  3. A rise in the exchange rate
  4. A fall in short-term interest rates
  5. A rise in long-term interest rates
Answer

(E)A rise in long-term interest rates

QN08. A retirement annuity is particularly attractive to someone who has:

  1. High longevity risk
  2. A large family
  3. Financial myopia
  4. Low longevity risk
  5. A severe illness
Answer

(A)High longevity risk

QN09. A share with a β-coefficient of 0.9 has a rate of return of 16%, when the whole market return is 17%. What return should it produce if the risk free rate rises from 7% to 8%, ceteris paribus.

  1. 16%
  2. 17%
  3. 23.3%
  4. 16.1%
  5. 22.3%
Answer

(B)17%

QN10. A sudden demand by depositors for notes and coin is an example of:

  1. Payment risk
  2. Asset risk
  3. Capital risk
  4. Currency risk
  5. Liquidity risk
Answer

(E)Liquidity risk

QN11. A treasury bill which matures in 62 days for £250,000 is currently trading at 248,000. The rate of discount on this bill is:

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

(E)4.7%

QN12. A unit trust fund is established with assets of £200m divided into 150m units. The value of the underlying assets rises to £250m. The value of each unit is:

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

(A)£1.66

QN13. According to the Fisher hypothesis, the nominal rate of interest consists of:

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

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

QN14. According to the liquidity preference theory of interest, an increase in uncertainty, other things being equal, will:

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

(C)Raise interest rates

QN15. According to the policy irrelevance theorem, why is policy irrelevant?

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

(C)Because it can't influence real variables

QN16. According to the rational expectations hypothesis:

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

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

QN17. All demand for money functions that are tested are macroeconomic relationships between the aggregate demand for money and other economic variables because:

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

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

QN18. An 'open-end' investment fund is one which:

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

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

QN19. An 'overdraft' economy is one in which:

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

(D)Borrowing and lending take place largely through intermediaries

QN20. An airline expands its fleet of planes just before a serious accident reduces the demand for its flights. This is an example of:

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

(A)Specific risk

QN21. An asset began the year with a price of £2.50. It paid income of 30p and finished the year at a price of £2.75. Over the year its rate of return was:

  1. 20%
  2. 10%
  3. 12%
  4. 55p
  5. 22%
Answer

(E)22%

QN22. An increase in (i) the price level and (ii) the rate of inflation:

  1. Cause the demand for money (i) to fall; (ii) to rise
  2. Both cause the demand for money to rise
  3. Both cause the demand for money to fall
  4. Cause the demand for money (i) to rise; (ii) to fall
Answer

(D)Cause the demand for money (i) to rise; (ii) to fall

QN23. As the level of interest rates in the economy falls, the demand for money, ceteris paribus:

  1. Will remain unchanged
  2. Could move in either direction depending on other factors
  3. Increase
  4. Will fall more or less in line with the change in interest rates
Answer

(C)Increase

QN24. Asset A has a variance of 25 while asset B has a variance of 9. The covariance of returns is -15. The proportion of a two asset portfolio that would have to be invested in A in order to create a perfectly riskless portfolio is:

  1. 0.375
  2. 0.675
  3. 0.3
  4. 0.5
  5. 0.6
Answer

(A)0.375

QN25. Assume that a central bank is willing to buy 14 day repos for $1m, with a repurchase price of $1,002,000. What rate of interest is the central bank charging?

  1. 0.2%
  2. 5.21%
  3. 2.0%
  4. 0.521%
  5. 52.1%
Answer

(B)5.21%

QN26. Assume that the central bank's main responsibility is to minimise the rate of inflation. A release of economic data suggests that inflationary pressure is increasing. In the circumstances the yield curve is likely to:

  1. Become steeper
  2. Remain unchanged
  3. Increase its downward slope
  4. Slope downward
  5. Become flat
Answer

(A)Become steeper

QN27. Bank deposit insurance was set up:

  1. To improve the operation of US monetary policy
  2. To deter people from taking risks in derivatives markets
  3. Following the Savings and Loan collapses of the 1980s
  4. Following the bank collapses of the 1930s
Answer

(D)Following the bank collapses of the 1930s

QN28. Because their flows of funds are largely contractual, life assurance companies can hold:

  1. Fewer liquid assets than pension funds
  2. More overseas shares than investment trusts
  3. More government bonds than banks
  4. More company shares than unit trusts
  5. A lower liquid assets ratio than deposit-taking institutions
Answer

(E)A lower liquid assets ratio than deposit-taking institutions

QN29. By taking out insurance cover an individual:

  1. Converts the possibility of large loss to certainty of a small one
  2. Reduces the certainty of major loss
  3. Transfers the risk to someone else
  4. Reduces the cost of an accident
  5. Reduces the risk of an accident
Answer

(A)Converts the possibility of large loss to certainty of a small one

QN30. Corporate bonds have higher yields than government bonds because:

  1. Corporate bonds have higher risk
  2. There is a smaller market
  3. Government bonds are inflation-proof
  4. Firms can afford higher interest payments
  5. They have longer maturities
Answer

(A)Corporate bonds have higher risk

QN31. Diversification is one way in which insurance companies can protect themselves against:

  1. The law of large numbers
  2. Random fluctuation
  3. Positively correlated risks
  4. Parameter change
  5. Moral hazard
Answer

(B)Random fluctuation

QN32. Five assets have expected mean returns and variances as follows: (A) 8% 15; (B) 12% 18; (C) 11% 18; (D) 15% 20; (E) 11% 17. Which of these assets will be rejected by all rational risk-averse investors?

  1. B
  2. D
  3. A
  4. E
  5. C
Answer

(E)C

QN33. Given a current rate of inflation of 3 per cent, and an expected rate of inflation next year of 5 per cent, what increase in nominal wages will workers seek in order to increase their real wage by 2 per cent:

  1. 7 per cent
  2. 4 per cent
  3. 5 per cent
  4. 6 per cent
  5. 3 per cent
Answer

(A)7 per cent

QN34. Given a fall in interest rates, the largest price change will occur in:

  1. Treasury bills with three months to maturity
  2. Six month time deposits
  3. Perpetual bonds
  4. Bonds with 20 years to maturity
  5. Bonds with five years to maturity
Answer

(C)Perpetual bonds

QN35. Government appointed members of the Monetary Policy Committee of the Bank of England are appointed:

  1. For set periods up to five years
  2. For one year at a time
  3. For unspecified periods
  4. Frequently
  5. For unspecified periods with a maximum of five years
  6. For 14 years
Answer

(A)For set periods up to five years

QN36. If a firm has one million shares in issue, earns profits of £200,000 and operates a retention ratio of 0.4, the dividend per share will be:

  1. 12p
  2. 10p
  3. 8p
  4. 4p
  5. 20p
Answer

(A)12p

QN37. If asset A has a variance of 49 while asset B has a variance of 36 while the correlation coefficient of their returns is 0.75, the covariance of the returns of the two assets is:

  1. 63.75
  2. 13.75
  3. 9.75
  4. 31.5
  5. 1323
Answer

(D)31.5

QN38. If interest rates rise, the present value of any future earnings is bound to:

  1. Increase in risk
  2. Fall
  3. Suffer from inflation
  4. Become more certain
  5. Rise
Answer

(B)Fall

QN39. If investors become income risk averse, they will:

  1. Hold long-dated assets to redemption
  2. Buy equities
  3. Sell long-dated assets
  4. Buy short-dated bonds
  5. Hold cash
Answer

(A)Hold long-dated assets to redemption

QN40. If long-term interest rates rise from 5 per cent to 6 per cent, the price of a perpetual UK government bond with a 7 per cent coupon will change by:

  1. +23.33
  2. +14
  3. 140
  4. -14
  5. -23.33
Answer

(E)-23.33

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