1. What are the risk implications to an investment bank from underwriting on a best-efforts basis versus a firm commitment basis? If you operated a company issuing stock for the first time, which type of underwriting would you prefer? Why? What factors may cause you to choose the alternative?
2. An investor notices that an ounce of gold is priced at $1,018 in London and $1,025 in New York. a. What action could the investor take to try to profit from the price discrepancy? b. Under which of the four trading activities would this action be classified? c. If the investor is correct in identifying the discrepancy, what pattern should the two prices take in the short term? d. What may be some impediments to the success of this transaction?
3. How is the net asset value (NAV) of a mutual fund determined? What is meant by the term marked-to-market daily?
4. What is the difference between a load fund and a no-load fund? Is the argument that load funds are more closely managed and therefore have higher returns supported by the evidence presented in Table 5-6?
5. a. What is the amount of the annuity purchase required if you wish to receive a fixed payment of $200,000 for 20 years? Assume that the annuity will earn 10 percent per year. b. Calculate the annual cash flows from a $1 million, 20-year fixed-payment annuity earning a guaranteed 10 percent per year if payments are to begin at the end of the current year. c. Calculate the annual cash flows from a $1 million, 20-year fixed-payment annuity earning a guaranteed 10 percent per year if payments are to begin at the end of year 5.
6. a. What does the loss ratio measure? What has been the long-term trend of the loss ratio? Why? b. How is the combined ratio defined? What does it measure?
7. You are encouraged to raise your own questions for discussion as well