An insurance company has issued $700,000,000 in short-term notes with a 1-year maturity to finance the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
An insurance company has issued $700,000,000 in short-term notes with a 1-year maturity to finance the purchase of $700,000,000 short-term investments with a 3-year maturity. The insurance company must pay 5.5% annual interest on the notes but earns 8.2% annual interest on the investments. a. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 1. (5 points) b. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 2 if the bank must issue new notes with 7.3% annual interest. (5 points) c. What type of interest rate risk is the insurance company facing due to the different maturities on its assets and liabilities? Why is this a concern to the insurance company? (3 points) An insurance company has issued $700,000,000 in short-term notes with a 1-year maturity to finance the purchase of $700,000,000 short-term investments with a 3-year maturity. The insurance company must pay 5.5% annual interest on the notes but earns 8.2% annual interest on the investments. a. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 1. (5 points) b. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 2 if the bank must issue new notes with 7.3% annual interest. (5 points) c. What type of interest rate risk is the insurance company facing due to the different maturities on its assets and liabilities? Why is this a concern to the insurance company? (3 points)
Expert Answer:
Answer rating: 100% (QA)
A 13 Compulation of and insurance co Profit Spoeed Dollar Jalue of profit at end of fees Compan... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0324592375
17th Edition
Authors: James D. Stice, Earl K. Stice, Fred Skousen
Posted Date:
Students also viewed these accounting questions
-
An option dealer needs to finance the purchase of a security and holds an inventory of U.S. Treasury bills. Explain how the dealer can use the repo market for financing the security purchase?
-
The Shakey Company can finance the purchase of a new building costing $2 million with a bond issue, for which it would pay $100,000 interest per year, and then repay the $2 million at the end of the...
-
To finance the purchase of the machine by issuing RM6 million, six-year, zero interest-bearing note to the seller on 1 July 2019. The expected interest rate for the note is 5.5%. The company is...
-
The graph of f(x) = ax 2 + bx + c is shown in the figure. Solve each inequality. (a) f(x) < 0 (b) f(x) = 0 I 3 -y=f(x)
-
Baksheesh, Mordida, and Kumshah: Making Grease Payments Abroad In the Middle East, bribes are called baksheesh. In Mexico, they are mordida; and in Southeast Asia, kumshah. Although it takes place in...
-
A load consists of a 60- resistor in parallel with a 90 F capacitor. If the load is connected to a voltage source s v (t) = 40 cos 2000t, find the average power delivered to the load.
-
A student who is using Fleury's algorithm to construct an Euler trail has decided to begin with \(f ightarrow d ightarrow a ightarrow b ightarrow\) .... If the student is off to a good start, help...
-
Creative Sound Systems sold investments, land, and its own common stock for $40 million, $16 million, and $42 million, respectively. Creative Sound Systems also purchased treasury stock, equipment,...
-
\f
-
The COVID-19 pandemic affected companies in the food industry in unique ways, particularly during 2020. Ruth's Hospitality Group (Ticker: RUTH) develops and operates fine dining restaurants under the...
-
Mr and Mrs A have a son, B, and a daughter, C. C marries Y, who is the son of Mr and Mrs X. C and Y have a daughter, Z. a) Briefly explain the difference between consanguinity and affinity. b)...
-
Because of a new product line, your company's sales over the last few months have increased significantly. As a result, the amount of cash held by the company has increased to levels never...
-
assume the direct cost of manufacturing is 50% of sales, 30% is attributed to employee salaries, and profit accounts in 20%. further assume through better planning we can reduce the cost of...
-
A middle manager in Malaysia is about to be stationed for two years to Canada. Canada has relatively low power distance whereas employees in Malaysia have quite high power distance. Advise the...
-
How does the use of computational methods and density functional theory (DFT) in catalysis research enhance our ability to predict catalytic behavior, and what are the limitations of these...
-
Compare the advantages and disadvantages of using a Dutch Auction to a traditional underwriting method for an IPO. Identify one real-life IPO that occurred in 2020. (Not Airbnb) For this one IPO,...
-
Phillip is watching a satellite launch from an observation spot 5 miles away Find the angle of elevation from Phillip to the satellite which is at a height of 4 8 miles AnswerHow to enter your answer...
-
Use integration by parts to evaluate the following. Check your answer by taking the derivative. x2e-xdx
-
GoodeHill Company replaced some parts of its factory building during 2011: (a) The outside corrugated covering on the factory walls was removed and replaced. The job was done by an expert crew from...
-
On May 1, 2008, Glacier Bay Co. acquired $30,000 of Horizon Corp. 8% bonds at 97 plus accrued interest. Interest on bonds is payable semiannually on March 1 and September 1, and bonds mature on...
-
Madison Company has purchased land that will serve as a temporary repository for nuclear waste. The site will function for 20 years, at which time Madison will be required to completely decontaminate...
-
Maurice Turner, the owner of a newsletter for managers of hotels and restaurants, has prepared the following condensed amounts from his companys financial statements for 20x6: Given these figures,...
-
What percentage of a general managers time and energy should be devoted to public relations and advocacy?
-
In CVS Corporations annual report in the Supplement to Chapter 1, refer to the balance sheet and the Summary of Significant Accounting Policies in the notes to the financial statements. 1. Examine...
Study smarter with the SolutionInn App