How does the primary function of an insurance company compare with that of a depositary institution?What is the adverse selection problem? How does adverse selection affect the profitable management of an insurance company?
2) What is the adverse selection problem? How does adverse selection affect the profitable management of an insurance company?
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?
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