Chapter 5 Problems

6. How does the risk of short-term funds differ from the risk of long-term funds?

12. Suppose today a mutual fund contains 2000 shares of J.P Morgan Chase, currently trading at $64.75, 1000 shares of Walmart, currently trading at$63.10 and 2500 shares of Pfizer, currently trading at $31.50. The mutual fund has no liabilities and 10000 shares outstanding held by investors.

A) What is the NAV of the fund?

B) Calculate the change in the NAV of the fund if tomorrow J.P Morgan’s shares increases to $66, Walmart shares increases to $68 and Pfizer’s shares increases to $34.

C) Suppose that today 1,000 additional investors buy one share each of the mutual fund at the NAV of $27,135. This means that the fund manager has $27,135 in additional funds to invest. The fund manager decides to use these additional funds to buy additional shares in Walmart. Calculate tomorrow’s NAV given the same rise in share values as assumed in (b).

15. Open-end fund A has 165 shares of AT&T valued at $35 each and 30 shares of Toro valued at $75 each. Closed-end Fund B owns 75 shares of AT&T and 72 shares of Toro. each funds have 1,000 shares outstanding.

A) What is the NAV of each fund using the prices?

B) If the price of AT&T stock increases to 36.25 and the price of Toro stock declines to $72.292, how does that impact the Nav of both funds?

C) Assume that another 155 shares of AT&T valued are added to Fund A. The funds needed to buy the new shares are obtained by selling 676 more shares in Fund A. What is the effect on Fund a’s NAV if the stock prices remain unchanged from the original prices?

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Chapter 6 Problems

7. You deposit $10,000 annually into a life insurance fund for the next 10 years, after which time you plan to retire.

A. If the deposits are made at the beginning of the year and earn an interest rate of 8 percent, what will be the amount of retirement funds at the end of year 10?

B. Instead of a lump sum, you wish to receive annuities for the next 20 years (years 11 through 30). What is the constant annual payment you expect to receive at the beginning of each year if you assume an interest rate of 8 percent during the distribution period?

C. Repeat parts (a) and (b) above assuming earning rates of 7 percent and 9 percent during the deposit period and earning rates of 7 percent and 9 percent during the distribution period. During which period does the change in the earning rate have the greatest impact?

15. How do state guarantee funds for life insurance companies compare with deposit insurance for depository institutions?

21. Identify the four characteristics or features of the perils insured against by property casualty insurance. Rank the features in terms of actuarial predictability and total loss potential.

Note that I took all these questions from

• Saunders, Anthony, and Marcia Milton Cornet, Financial Institutions Management: A Risk Management Approach, 9th ed., New York, McGraw-Hill Education, 2018.