1) How does the primary function of an insurance company compare with that of a

Question

1) How does the primary function of an insurance company compare with that of a depositary institution?

2) What is the adverse selection problem? How does adverse selection affect the profitable management of an insurance company?

3)

a. Suppose a 65-year-old person wants to purchase an annuity from an insurance company that would pay $20,000 per year until the end of that person's life. The insurance company expects this person to life for 15 more years and would be willing to pay 6 percent on the annuity. How much should the insurance company ask this person to pay for the annuity?

b. A second 65-year-old person wants the same $20,000 annuity, but this person is healthier and is expected to life for 20 more years. If the same 6 percent interest rate applies, how much should this healthier person be charged for the annuity?

c. In each case, what is the difference in the purchase price of the annuity if the distribution payments are made at the beginning of the year?

4) What are the key activity areas for securities firms? How does each activity area assist in the generation of profits and what are the major risks for eeach area?

5) What is the difference between pure arbitrage and risk arbitrage? If an investor observes the price of a stock trading in one exchange to be different from its price in another exchange, what form of arbitrage is applicable and how could the investor participate in that arbitrage?

6) The MEP company has issued 5,000,000 new shares. Its investment bank agrees to underwrite these shares on a best effort basis. The investment bank is able to sell 4,200,000 shares for $54 per share. It charges MEP $1.25 per share sold. How much money does MEP receive? What is the investment bank's profit? What is the stock price of MEP?

Explanation / Answer

Depository institutions---is a financial institution (such as a savings bank, commercial bank, savings and loan association, or credit union) that is legally allowed to accept monetary deposits from consumers.It contribute to the economy by lending much of the money saved by depositors.

financial non depository institutions are financial intermediaries that do not accept deposits but do pool the payments of many people in the form of premiums or contributions and either invest it or provide credit to others. Hence, nondepository institutions form an important part of the economy. These institutions receive the public's money because they offer other services than just the payment of interest. They can spread the financial risk of individuals over a large group, or provide investment services for greater returns or for a future income.
Nondepository institutions include insurance companies, pension funds, securities firms, government-sponsored enterprises, and finance companies. There are also smaller nondepository institutions, such as pawnshops and venture capital firms, but they constitute a much smaller portion of sources of funds for the economy

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