Questions 1. Answer the following questions for the property insurer PXY Inc.: a. What is the combined ratio if PXY Inc. has a loss ratio of 73%, a loss adjustment expense of 12.5%, and a ratio of commissions and other acquisition expenses of 18% ? (1.5 points) b. What is the combined ratio adjusted for investment yield if the company earns an investment yield of 8% ? (1 point) c. What is the overall profitability ratio of the company? (1 point) 2. Consider an FI that issues $200 million of liabilities with two years to maturity to finance the purchase of $200 million of assets with a one-year maturity. Suppose that the cost of funds (liabilities) for the FI is 5 percent per year and the return on the assets is 9 percent per year. a. Calculate the Fl's profit spread and dollar value of profit in year 1 ? (1 points) b. Calculate the profit spread and dollar value of profit in year 2, if the FI can reinvest its assets at 9 percent. ( 1.5 points) c. If interest rates fall and the FI can invest in one-year assets at 6 percent in the second year, calculate the Fl's profit spread and dollar value of profit in year 2. (1.5 points) d. If interest rates rise and the FI can invest in one-year assets at 11 percent in the second year, calculate the Fl's profit spread and dollar value of profit in year 2. (1.5 points) (1) The bond has a 10-year maturity, a fixed-rate coupon of 10% paid at the end of each year, and a par value of $50,000. The certificate of deposit has a 1-year maturity and an 8% rate of interest. The FI expects no additional asset growth. What will be the net interest income at the end of the first year? ( 1.5 points) (2) If at the end of year 1 market interest rates have increased 100 basis points (1\%), what will be the net interest income for the second year? Is this result caused by reinvestment risk or refinancing risk? (1.5 points) (3) Assuming that market interest rates increase 1\%, what will be the value of the bond at the end of year 1? What will be the market value of the equity for the Fl? (1.5 points) (4) If market interest rates had decreased 100 basis points by the end of year 1 , what will be the value of the bond at the end of year 1 ? What will be the market value of the equity for the FI ? (1.5 points) Questions 1. Answer the following questions for the property insurer PXY Inc.: a. What is the combined ratio if PXY Inc. has a loss ratio of 73%, a loss adjustment expense of 12.5%, and a ratio of commissions and other acquisition expenses of 18% ? (1.5 points) b. What is the combined ratio adjusted for investment yield if the company earns an investment yield of 8% ? (1 point) c. What is the overall profitability ratio of the company? (1 point) 2. Consider an FI that issues $200 million of liabilities with two years to maturity to finance the purchase of $200 million of assets with a one-year maturity. Suppose that the cost of funds (liabilities) for the FI is 5 percent per year and the return on the assets is 9 percent per year. a. Calculate the Fl's profit spread and dollar value of profit in year 1 ? (1 points) b. Calculate the profit spread and dollar value of profit in year 2, if the FI can reinvest its assets at 9 percent. ( 1.5 points) c. If interest rates fall and the FI can invest in one-year assets at 6 percent in the second year, calculate the Fl's profit spread and dollar value of profit in year 2. (1.5 points) d. If interest rates rise and the FI can invest in one-year assets at 11 percent in the second year, calculate the Fl's profit spread and dollar value of profit in year 2. (1.5 points) (1) The bond has a 10-year maturity, a fixed-rate coupon of 10% paid at the end of each year, and a par value of $50,000. The certificate of deposit has a 1-year maturity and an 8% rate of interest. The FI expects no additional asset growth. What will be the net interest income at the end of the first year? ( 1.5 points) (2) If at the end of year 1 market interest rates have increased 100 basis points (1\%), what will be the net interest income for the second year? Is this result caused by reinvestment risk or refinancing risk? (1.5 points) (3) Assuming that market interest rates increase 1\%, what will be the value of the bond at the end of year 1? What will be the market value of the equity for the Fl? (1.5 points) (4) If market interest rates had decreased 100 basis points by the end of year 1 , what will be the value of the bond at the end of year 1 ? What will be the market value of the equity for the FI ? (1.5 points)
