LOMA 308 Module 3 Exam
Questions and Answers All
Correct
The Glendale Insurance Company combines individual budgets from each department
into a single budget that shows the company's overall operating and financing plans for
the next accounting period.
Capital budget
Revenue budget
Cash budget
Master budget - Answer-master budget
Exeter Insurance Company is considering buying a new office building. Before finalizing
the transaction, senior management created a budget to determine the project's long-
term benefits.
Capital budget
Revenue budget
Cash budget
Master budget - Answer-capital budget
Which characteristics describe an insurance company's Annual Statement? (Choose all
that apply.)
Designed to provide information about company profitability
Designed to provide information about company solvency
Used primarily by investors and the public
Used primarily by regulators
Reported on a going concern basis
Required for all U.S. insurance companies
Required by the Securities and Exchange Commission (SEC) for publicly traded
companies and companies that offer variable products - Answer-- designed to provide
information about company solvency
- used primarily by regulators
- required for all U.S. insurance companies
Friendly Fraternal Life Insurance, Melody Mutual Life Insurance, and Stellar Life
Insurance all operate within the United States.
,Friendly Fraternal sells term and whole life insurance products and fixed immediate
annuities.
Melody Mutual sells term and whole life insurance products and variable annuity
products.
Stellar is a publicly traded stock insurer that sells term and whole life insurance
products.
Companies that are required by the Securities and Exchange Commission to publish an
annual report include - Answer-Melody Mutual must publish an annual report because it
sells variable products. Although Stellar doesn't sell variable products, it must publish an
annual report because it's a publicly traded company. Although Friendly may choose to
publish an annual report, it isn't required to do so because it doesn't issue stock or sell
variable products.
Linking the Income Statement and Balance Sheet - Answer-When an insurer's income
statement shows a net gain, that gain increases the company's capital and surplus and
is reflected in the company's balance sheet for the next period.
Because assets = liabilities + capital and surplus, the company's net income also
changes the amount for assets on the balance sheet—from $16,408,000 to
$16,600,000 ($16,408,000 + $192,000 = $16,600,000).
Identify the terms that would appear on an insurance company's income statement
under Revenues. (Choose all that apply.)
Investment income
Benefits and claims
Premiums
Utilities
Sales commissions
Investment expenses
Fee income - Answer-Premiums, Fee income, Investment income
Identify the terms that would appear on an insurance company's income statement
under Expenses. (Choose all that apply.)
Investment income
Benefits and claims
Premiums
Utilities
Sales commissions
Investment expenses
Fee income - Answer-Benefits and claims, utilities, sales commission, investment
expenses
An insurance company's income statement illustrates the relationship between company
revenues, expenses, and net income. A company's net income is equal to
Revenues + Expenses
Revenues x Expenses
Revenues - Expenses
,Revenues ÷ Expenses - Answer-revenues - expenses
Interest on investments, 3 factors affect their growth - Answer-1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates - Answer-Remember that interest is a fee that individuals and financial
institutions pay (or charge) for the use of borrowed money. And the amount of interest
earnings depends on the interest rate that's applied to the principal.
Interest rates are usually stated in decimal form, so a 5 percent interest rate appears as
0.05 and a 2.5 percent rate appears as 0.025.
Interest earned = $1,000 × 0.025 = $25
Calculating Interest Earned - Answer-Principal (regular amount) × Interest rate =
Interest earned
Interest rate - Answer-Interest rate = Interest amount ÷ Principal
simple interest - Answer-the amount of interest earned for one year is equal to the
principal multiplied by the interest rate. As a result, when an investment earns simple
interest, the nominal interest rate and the effective interest rate are the same.
The total amount of simple interest earned is equal to the interest for one year multiplied
by the number of years in the investment period.
At a constant annual rate of 5% simple interest, after 100 years the $10 account would
have earned $50 in interest (100 x $0.50), and the total value of the investment would
be $60.00.
Compound interest - Answer-When interest is compounded, the interest earned each
investment period is added to the original principal amount, and that total is used as the
beginning balance when calculating interest earnings for the next period. In this case,
the effective interest rate is greater than the nominal interest rate.
Compound Interest:
At a constant annual rate of 5% compound interest, after 100 years the $10 investment
would have earned $1,305.01 in interest and the total value of the investment would be
$1,315.01.
Effective Interest Rate - Answer-The type of interest rate that includes the effects of
compounding.
The Rule of 72 - Answer-Investors can use a simple rule of thumb known as the Rule of
72 to estimate how fast a principal sum doubles at a specified compound interest rate.
The Rule of 72 states that, for a known interest rate, under annual compounding, the
, approximate number of years for a principal sum to double is 72 divided by the interest
rate.
Years to double = 72 ÷ Interest rate
Steadfast Insurance can calculate the interest amount it earned on an initial sum of
money invested for one year at a specified interest rate by ( multiplying / dividing ) the
principal by the interest rate.
multiplying
dividing - Answer-Multiplying- An investor can calculate the interest amount earned on
an initial sum of money invested for one year at a specified interest rate by multiplying
the principal by the interest rate.
Because ( simple / compound ) interest is applied to the same amount of principal each
year, the amount of interest earned each year is the same, found by multiplying the
principal amount by the interest rate.
simple
compound - Answer-simple- Because simple interest is applied to the same amount of
principal each year, the amount of interest earned each year is the same, found by
multiplying the principal amount by the interest rate.
Because the nominal interest rate includes the effects of compounding, it's usually
greater than the effective interest rate.
True
False - Answer-False- Because the effective interest rate includes the effects of
compounding, it's usually greater than the nominal interest rate. And it increases even
more if interest is compounded more than once each year.
Steadfast Insurance can use the Rule of 72 to
A. Estimate how fast a principal sum doubles at a specified compound interest rate
B. Determine the rate of interest a principal sum must earn to double in a certain
number of years.
Both A and B
A only
B only
Neither A nor B - Answer-The Rule of 72 states that, for a known interest rate, under
annual compounding, the approximate number of years for a principal sum to double is
72 divided by the interest rate.The Rule of 72 can also help determine the rate of
interest a principal sum must earn to double in a certain number of years.
So far, you've seen how factors such as interest rates, types of interest, and time affect
investment values. How do you think insurers use this information? (Choose all that
apply.) - Answer-The time value of money (TVOM) concept explains the effects of
interest rates, types of interest, and time on investment values. Insurers use TVOM to
determine the future value of an investment and the amount they need to invest today to
earn a given amount in the future. TVOM doesn't help with investment choices.
Questions and Answers All
Correct
The Glendale Insurance Company combines individual budgets from each department
into a single budget that shows the company's overall operating and financing plans for
the next accounting period.
Capital budget
Revenue budget
Cash budget
Master budget - Answer-master budget
Exeter Insurance Company is considering buying a new office building. Before finalizing
the transaction, senior management created a budget to determine the project's long-
term benefits.
Capital budget
Revenue budget
Cash budget
Master budget - Answer-capital budget
Which characteristics describe an insurance company's Annual Statement? (Choose all
that apply.)
Designed to provide information about company profitability
Designed to provide information about company solvency
Used primarily by investors and the public
Used primarily by regulators
Reported on a going concern basis
Required for all U.S. insurance companies
Required by the Securities and Exchange Commission (SEC) for publicly traded
companies and companies that offer variable products - Answer-- designed to provide
information about company solvency
- used primarily by regulators
- required for all U.S. insurance companies
Friendly Fraternal Life Insurance, Melody Mutual Life Insurance, and Stellar Life
Insurance all operate within the United States.
,Friendly Fraternal sells term and whole life insurance products and fixed immediate
annuities.
Melody Mutual sells term and whole life insurance products and variable annuity
products.
Stellar is a publicly traded stock insurer that sells term and whole life insurance
products.
Companies that are required by the Securities and Exchange Commission to publish an
annual report include - Answer-Melody Mutual must publish an annual report because it
sells variable products. Although Stellar doesn't sell variable products, it must publish an
annual report because it's a publicly traded company. Although Friendly may choose to
publish an annual report, it isn't required to do so because it doesn't issue stock or sell
variable products.
Linking the Income Statement and Balance Sheet - Answer-When an insurer's income
statement shows a net gain, that gain increases the company's capital and surplus and
is reflected in the company's balance sheet for the next period.
Because assets = liabilities + capital and surplus, the company's net income also
changes the amount for assets on the balance sheet—from $16,408,000 to
$16,600,000 ($16,408,000 + $192,000 = $16,600,000).
Identify the terms that would appear on an insurance company's income statement
under Revenues. (Choose all that apply.)
Investment income
Benefits and claims
Premiums
Utilities
Sales commissions
Investment expenses
Fee income - Answer-Premiums, Fee income, Investment income
Identify the terms that would appear on an insurance company's income statement
under Expenses. (Choose all that apply.)
Investment income
Benefits and claims
Premiums
Utilities
Sales commissions
Investment expenses
Fee income - Answer-Benefits and claims, utilities, sales commission, investment
expenses
An insurance company's income statement illustrates the relationship between company
revenues, expenses, and net income. A company's net income is equal to
Revenues + Expenses
Revenues x Expenses
Revenues - Expenses
,Revenues ÷ Expenses - Answer-revenues - expenses
Interest on investments, 3 factors affect their growth - Answer-1. Interest rate
2. The type of interest
3. The time period during which the invested principal earns interest
Interest rates - Answer-Remember that interest is a fee that individuals and financial
institutions pay (or charge) for the use of borrowed money. And the amount of interest
earnings depends on the interest rate that's applied to the principal.
Interest rates are usually stated in decimal form, so a 5 percent interest rate appears as
0.05 and a 2.5 percent rate appears as 0.025.
Interest earned = $1,000 × 0.025 = $25
Calculating Interest Earned - Answer-Principal (regular amount) × Interest rate =
Interest earned
Interest rate - Answer-Interest rate = Interest amount ÷ Principal
simple interest - Answer-the amount of interest earned for one year is equal to the
principal multiplied by the interest rate. As a result, when an investment earns simple
interest, the nominal interest rate and the effective interest rate are the same.
The total amount of simple interest earned is equal to the interest for one year multiplied
by the number of years in the investment period.
At a constant annual rate of 5% simple interest, after 100 years the $10 account would
have earned $50 in interest (100 x $0.50), and the total value of the investment would
be $60.00.
Compound interest - Answer-When interest is compounded, the interest earned each
investment period is added to the original principal amount, and that total is used as the
beginning balance when calculating interest earnings for the next period. In this case,
the effective interest rate is greater than the nominal interest rate.
Compound Interest:
At a constant annual rate of 5% compound interest, after 100 years the $10 investment
would have earned $1,305.01 in interest and the total value of the investment would be
$1,315.01.
Effective Interest Rate - Answer-The type of interest rate that includes the effects of
compounding.
The Rule of 72 - Answer-Investors can use a simple rule of thumb known as the Rule of
72 to estimate how fast a principal sum doubles at a specified compound interest rate.
The Rule of 72 states that, for a known interest rate, under annual compounding, the
, approximate number of years for a principal sum to double is 72 divided by the interest
rate.
Years to double = 72 ÷ Interest rate
Steadfast Insurance can calculate the interest amount it earned on an initial sum of
money invested for one year at a specified interest rate by ( multiplying / dividing ) the
principal by the interest rate.
multiplying
dividing - Answer-Multiplying- An investor can calculate the interest amount earned on
an initial sum of money invested for one year at a specified interest rate by multiplying
the principal by the interest rate.
Because ( simple / compound ) interest is applied to the same amount of principal each
year, the amount of interest earned each year is the same, found by multiplying the
principal amount by the interest rate.
simple
compound - Answer-simple- Because simple interest is applied to the same amount of
principal each year, the amount of interest earned each year is the same, found by
multiplying the principal amount by the interest rate.
Because the nominal interest rate includes the effects of compounding, it's usually
greater than the effective interest rate.
True
False - Answer-False- Because the effective interest rate includes the effects of
compounding, it's usually greater than the nominal interest rate. And it increases even
more if interest is compounded more than once each year.
Steadfast Insurance can use the Rule of 72 to
A. Estimate how fast a principal sum doubles at a specified compound interest rate
B. Determine the rate of interest a principal sum must earn to double in a certain
number of years.
Both A and B
A only
B only
Neither A nor B - Answer-The Rule of 72 states that, for a known interest rate, under
annual compounding, the approximate number of years for a principal sum to double is
72 divided by the interest rate.The Rule of 72 can also help determine the rate of
interest a principal sum must earn to double in a certain number of years.
So far, you've seen how factors such as interest rates, types of interest, and time affect
investment values. How do you think insurers use this information? (Choose all that
apply.) - Answer-The time value of money (TVOM) concept explains the effects of
interest rates, types of interest, and time on investment values. Insurers use TVOM to
determine the future value of an investment and the amount they need to invest today to
earn a given amount in the future. TVOM doesn't help with investment choices.
