Reference no: EM13705313

The theory of purchasing power parity states that, between two nations, the :

interest rates are higher for stronger currencies

currency of country with higher inflation would appreciate relative to currency of country with lower inflation

the inflation rates in two countries are unrelated

appreciation or depreciation in exchange rate would be approximately equal to difference in inflation between two countries


A disadvantage of whole life policies is that

the cash value is frozen and not available to policyholders

the premiums are not predictable

the face value of the policy can change over time.

they are much more expensive than term policies.


Thomas owns a house which has a replacement cost of $1.2 million. He has an homeowner's policy of $650,000 with a 80% coinsurance clause. There was a major damage in the house which resulted in an outlay of $225,000 to replace it. How much will the insurance company reimburse him for?

$152,344

$187,525

$180,000

$131,875


Consider the following information of a Whole Life policy and a Term Life policy:
Guaranteed Contract Premium Guaranteed Death Benefit Projected
Dividend Projected Cash Value Term Premium
$2,300 $200,000 0 0 $325
$2,300 0 0 $330
$2,300 0 0 $335
$2,300 0 $3,500 $340
$2,300 $250 $6,000 $355
$2,300 $400 $9,000 $370
$2,300 $600 $13,000 $390
Which policy is better if cash can be invested at 9% return?

Term Life Policy since IRR of difference in cash flows is greater than 9%

Whole Life Policy since IRR of difference in cash flows is greater than 9%

Term Life Policy since IRR of difference in cash flows is less than 9%

Whole Life Policy since IRR of difference in cash flows is less than 9%

Richard has the following three disability policies: (i) Policy A for $12,000 per year has an own occupation definition and was paid for by his employer, (ii) Policy B for $18,000 per year was paid by him and has an own occupation definition, (iii) Policy C for $16,000 annual coverage was purchased by him and has no own definition. Richard is in 25% marginal tax bracket. If Richard suffers an injury at his work and is unable to perform in his existing occupation but can work in some other field; how much post tax dollars would he receive due to these policies?

$34,500

$25,000

$27,000

$22,500


Steve is about to retire and wants to calculate the total worth of his retirement assets. He has a corporate pension paying $2250 at the beginning of every month. He is also entitled for Social Security benefits of $1450 at the beginning of every month. He also has a 401(k) plan with an accumulated balance of $480,000. The regular U.S. government bonds are yielding 5.5% and government inflation indexed bond provides a current return of 3.5% and his remaining life span is 18 years. Compute the combined worth of Steve's retirement assets.

$980,450

$1,022,301

$1,014,463

$1,066,941


Which of the following is used to only allow you to insure an item when you yourself would suffer a loss should the item be damaged?

Indemnity

Coinsurance

Deductible

Insurable interest


Which of the following is used to set maximum reimbursement in the event of loss of an asset that you own equal to the value of the item?

Coinsurance

Deductible

Indemnity

Insurable interest


What is withdrawal risk in retirement planning?

The potential of below asset returns

The risk that a household member will withdraw savings from a retirement account without permission

The chance of taking monies out to fund retirement when asset prices are depressed

The risk that an individual will miss working upon retirement


Bianca and Mildred had the same starting sum of $115,000. Each made withdrawals of $11,000 at at end of each year. In years 2, 3, and 4, each had returns of 8% percent a year. Bianca had a 30% drop in year 1 and a 40% gain in year 5, while Mildred had a 40% gain in year 1 and a 45 percent drop in year 5. What is the difference in their accounts at the end of year 5.

$11,710

$98,881

$10,642

$10,889


Rosa is about to turn 62 and she is in dillema whether to take reduced social security benefits at 62 or wait till 65 to get full benefits. She would be entitled to get $20,250 annually at full retirement age of 65, while she would get 77.5% of this amount if she decides to take social security at 62. Which option she should select if she can earn 8% return and her life expectancy is 80 years?

She should start taking at 62 since present value of benefits is $147,080 as against $137,595 at 65

She should wait till 65 since present value of benefits is $173,329 as against $147,080 at 62

She should wait till 65 since present value of benefits is $173,329 as against $138,599 at 62

She should start taking at 62 since present value of benefits is $147,080 as against $132,266 at 65


Marvin had two term policies to compare with costs as shown below. Based on 5% after tax discount rate, which one should he select and why?
Years Policy A Policy B
1 $195 $210
2 $240 $220
3 $250 $235
4 $270 $260
5 $290 $285

Policy B, since NPV of Policy A is $1069 while NPV of Policy B is $1040

Policy B, since NPV of Policy A is $1122 while NPV of Policy B is $1092

Policy A, since NPV of Policy A is $1122 while NPV of Policy B is $1092

Policy B, since NPV of Policy A is $1069 while NPV of Policy B is $1092


Mike currently 35, has $15,000 saved for retirement. He is currently saving $450 at the beginning of every month and his employer matches his total savings contribution on a monthly basis. Mike projects that he could earn 7% on his savings. He plans to retire at 65 and expects to live until age 90. His current expenditure on basic needs at the beginning of every month is $2200 every month which is expected to increase with inflation of 4%.

How much would be shortfall or excess in his retirement account?

$334,475 excess

$337,138 shortfall

$337,138 excess

$334,475 shortfall


Amanda is expected to receive full social security retirement benefit of $15500 annually when she turns 65. These benefits can be increased by 40% if she delays taking them till age 70. If her life expectancy is 85 years and expected rate of return is 3%, should Amanda take full benefit at 65 or delay benefit till 70? Assume no other income and taxes during retirement.

She should start at 65 since present value of benefits is $230,601 as against $223,462 at 70

She should wait till 70 since present value of benefits is $259,053 as against $223,462 at 65

She should start at 65 since present value of benefits is $259,053 as against $223,462 at 70

She should wait till 70 since present value of benefits is $259,053 as against $230,601 at 65


John was considering whether to place $10,000 in a tax-deferred annuity or a tax-free municipal bond. Assume the municipal returned 4% a year and the tax-deferred annuity 5.5%. Calculate approximately how long he would have to hold the annuity so that, if he withdrew the money and paid taxes on it, he would come out ahead. His marginal tax rate is 20%.

16 years

23 years

33 years

28 years


Susan saved $500 at the end of every month in her retirement account for 10 years (during age 25-35) and then quit saving. However, she did not make any withdrawal until she turned 65 (i.e., 30 years after she stopped saving). Her friend Cathy started saving $650 at the end of every year for 30 years during age 35 - 65. What will be the difference in accumulated balances in their retirement accounts at age 65 if both earned an average return of 8.5% (compounded monthly) during the entire period?

$31,591

$562,479

$121,015

$235,305


Linda is 35 year old but misrepresented her age as 30, while purchasing a life insurance policy for $40,000. For each $1000 of the policy, it costs $45 for age 35, and $35 for age 30. In the event, Linda dies and the insurance company discovers her lie, then what would be the amount which her beneficiary would get?

$30,000

$31,111

$35,000

$0


James bought a $350,000 whole life policy on his own life on July 1 of the current year. The premiums were $275 per month payable of the 1st day of every month. This policy contains a suicide clause for a period of two years. On November 15 of the following year, James committed suicide. What is payable to his beneficiary, assuming the premiums were paid as agreed up to November 1 of the following year. Average interest rate in the economy is 4% per year.

$4675

$350,000

$4,400

$0


Consider the following information of a Whole Life policy and a Term Life policy:
Guaranteed Contract Premium Guaranteed Death Benefit Projected
Dividend Projected Cash Value Term Premium
$2,300 $200,000 0 0 $325
$2,300 0 0 $330
$2,300 0 0 $335
$2,300 0 $3,500 $340
$2,300 $250 $6,000 $355
$2,300 $400 $9,000 $370
$2,300 $600 $13,000 $390
What is the IRR of difference in cash flows between Whole Life and Term Life policies?

20.20%

5.82%

10.17%

1.44%

Charles and Martha (both age 30), each saved $15,000 (pre tax ) at the end of every year over their working lives. Both worked till age 65 years. Charles saved his money in a qualified pension plan while Martha saved in her personal account after paying taxes. Martha turned over her portfolio every year and the combination of ordinary income on dividends and interest and capital gains on sale of stock came to a 20% tax rate on investment returns. If both generated a pretax return of 6% per year and were in 25% marginal tax bracket throughout their lives, compute the difference in their net accumulated savings at retirement.

$222,849

$696,535

$278,654

$167,137