FIN 412 FINAL EXAM QUESTIONS WITH COMPLETE SOLUTIONS

FIN 412 FINAL EXAM QUESTIONS WITH
COMPLETE SOLUTIONS

How much life insurance do you need? - answer-Needs approach - determine needs of
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the family after the death of income earner
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Earnings multiple approach - multiply present annual gross income by the earning
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multiple to get the lump-sum needed to replace the stream of income (multiple depends
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on number of years and rate of return)
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Term life insurance - answer-provides protection for a specified time, 1-30 years. Least
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expensive, low initial premium, increases with age. Fixed death benefit. No cash value.
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Whole life insurance - answer-Provide permanent protection. Fixed premium. Fixed
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death benefit. Cash value is fixed, investment portion grows on a tax-deferred basis
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while policy is in force.
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Universal life insurance - answer-Provides permanent protection. Flexible premium
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payments based on amount and timing for financial needs. Death benefits are flexible.
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Cash value depends on the level of payment and the investment results of the insurance
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company (also grows tax deferred).
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Variable life insurance - answer-Provides permanent protection. Allows for fixed or
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flexible premium. Death benefits are flexible, reflecting performance of mutual funds.
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Cash value depends on performance of mutual funds, policyholder controls the
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investment strategy.
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Riders - answer-COLA Rider - death benefit increases at the same rate as inflation
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Living Benefits Rider - grants early payout percentage of the anticipated death benefits
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to the terminally ill
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traditional net cost method - answer-a method of comparing insurance costs that sums
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cthe premiums over a state period and subtracts from this the sum of all dividends over
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cthat same period
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Interest-Adjusted Net Cost Method - answer-a method of comparing insurance costs that c c c c c c c c c c c


cincorporates the time value of money into the calculation c c c c c c c c


(surrender cost index) c c

, Health Maintenance Organization (HMO) - answer-prepaid insurance plan that entitles
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members to the services of participating doctors, hospitals and clinics (one location,
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fee/copay)
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long-term care insurance - answer-insurance that is aimed at covering the costs
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cassociated with long term nursing home care, commonly associated with the victims of
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cstroke, chronic illness, or Alzheimer's disease or those who can simply no longer
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cmanage to live on their own c c c c c




Primary market - answer-IPO, Seasoned equity offerings, investment banker,
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underwriter, prospectus
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a market in which newly issued, as opposed to previously issued, securities are traded
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Secondary markets - answer-the markets in which previously issued securities are
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traded
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Organized exchange - an exchange the occupies a physical location where trading
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occurs, such as the NY Stock Exchange
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Over-the-counter market - a market in which transactions are conducted over the c c c c c c c c c c c


telephone or via a computer hookup rather than in an organized exchange
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bid and ask - answer-bid price - highest someone is willing to pay
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ask price - lowest someone is willing to sell
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international markets - answer--around for centuries c c c c c c


-some foreign shares traded on exchange in the US
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-american depository receipts - int'l stocks can be traded thru ADRs
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Regulation of securities - answer-protecting investors so that all have a fair chance of
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cmaking money c c


- Securities and Exchange Commission
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- self regulation: exchanges and FINRA
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avoid insider trading and market abuse (churning)
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Joint Tenancy Account with the Right of Survivorship - answer-when one owner dies, the
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other receives full ownership of the assets in the account
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Tenancy-in-Common Account - answer-the deceased's portion of the account goes to c c c c c c c c c c


the heirs of the deceased, not the surviving account holder
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Language of stocks - answer-limited liability - the most you can lose if the company goes
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bankrupt is your investment
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