Financial Markets and Institutions

FinancialMarkets and Institutions

FinancialMarkets and Institutions

Questionn1

  1. For term life policy insurance the coverage only caters for the defined period of living.

Anylife beyond the term of contract, there are no benefits as theyexpire. However, for whole life policy, an individual has aprotection for their whole life rather than a specified period oftime. Additionally, in early years, the individuals under term lifepolicy pay less than whole life policy holders. Term life pays afixed amount while whole life pays face amount of policy in case of acontingency. However, in the subsequent years, the reverse is thecase with those under term life policy paying more than individualswith whole life policies. The protection differences are advantageousto the whole life policy holder given that they are protected as longas they live while for term life policy, suppose individuals livepast the defined period, then they get no benefits.

  1. For Variable insurance policy holders, individual are free to invest their fixed premium payments in mutual funds of stock, bonds and any money market instruments.

Thusan individual saves and value increases depending on the assets onwhich they invest.

Individualswith universal life policy are free to make changes to premiumamounts and the time in which the life insurance contract matures.For the variable universal policy holders, apart from making changeslike the universal policy holders, they can invest their premiums inbond mutual funds, money and equity.

Question2

  1. The insurers are concerned about their yield given that unless they make investments out of the premiums then they are likely not to realize any profitability.

  2. There is need to make changes in rate regulations so that some states that are uncovered are taken care of in the activity line of auto insurance and workers’ compensation insurance.

Theregulators, state commissioners, should do away with the ceilingsthat they set on premiums and premiums increases.

Question3

  1. For a market maker conducting trading as an agency transaction, buys a stock and resells it to another buyer at a price commonly called bid ask spread while for principal transaction, they buy securities and hold them in their portfolios hoping for a price increment.

  2. For agency transactions, the profit is the difference between the buy and sell price while for principal transactions, the profits are calculated on price movements of securities which takes short or long inventory positions on their accounts.

  3. The second method is riskier for the market maker as it depends on expectation of price increase which might not take place as profits might not arise and the obligation to buy stocks even when crashing thus making a number of them to be bamkrupt.

Question4

  1. Investors

Forone to be accredited, in hedge, they must have a net worth of over $1million or have yearly income of at least $200,000 ($300,000 ifmarried). However, for mutual funds, the invrestor incurs sales loadsand fund operating expenses for them to be accredited.

  1. Regulations

Formutual funds, they are heavily regulated and the SEC is the mainregulator. However, mutual funds are not subjected to the numerousregulations that are applied to mutual funds. The two operate underdifferent registration requirements captured in the InvestmentCompany Act of 1940.

  1. Fees for Managers

Hedgefund managers usually charge two kinds of fees, the management andperformance fees, on the other hand, mutual funds the management feeis a percentage of the assets under management which normally runsbetween 1.5 to 2.0 percent.

  1. Risks

ForMutual funds there are minimal risks involved owing to the highregulation as compared to hedge funds that are not highly regulatedhence fraud and risks are numerous.

Question5

Fora defined benefit pension fund, the corporate employer gives theemployees certain specific cash benefit upon retirement while fordefined contribution pension fund, the employer does not offer anypre-commitment to provide a retirement income rather gives certaincontribution to the pension fund.

  1. Social Security insolvency is projected due to lack of enough capital to sustain it. Also, the decline in value of assets as compared to the liabilities.

  2. Reducing the benefits given to the retirees, this is not acceptable as it cuts on the benefits that they duly worked for.

Transferringof budget surplus which is politically correct as this helps improvewelfare of the people

Question6

  1. Insolvency risk is the risk that arises when FI is not able to offset the decline in the value of its assets that arises in comparison to the liabilities as a result of inadequate capital.

  2. Ensuring firm’s liquidity

Managinginterest rate hence reducing their fluctuations

  1. Insolvency risk arises from Liquidity risk when the customer is not able to make payments that they promised hence affecting profits and income

Insolvencyrisk arises from credit risk when the customer defaults on loanrepayments.