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math 3650- midterm extra questions from hw

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The Board of Directors sets the risk tolerances of the Corporation. In addition to the underlying economics (i.e. the risks to the underlying cash flows), what other factors may influence the risk tolerances they set?
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The Board of Directors sets the risk tolerances of the Corporation. In addition to the underlying economics (i.e. the risks to the underlying cash flows), what other factors may influence the risk tolerances they set?
Accounting (GAAP and/or Statutory), including volatility of earnings under these accounting rules
ratings agencies (Standard & Poors, Moodys, and AM Best)
investment analysts
insurance regulators.
If you could finance a project at the risk free rate, how would that affect the Net Present Value of a project?
The Fisher Separation Theorem states that security transactions in a normal market neither create nor destroy value on their own. Therefore, financing at the risk free rate merely alters the timing of the cash flows; it does not change the Net Present Value of the project.
What is the risk free rate? What is commonly used as the risk free rate in the U.S.?
The risk free rate is the rate at which money can be borrowed or lent with no risk.
The spot rate on a U.S. Treasury zero coupon bond that will mature in t years is used as the t year risk free rate.
How is the Risk Based Capital Ratio (RBC ratio) calculated? How large is it commonly believed that ratio needs to be for an insurance company to be rated AA by the major ratings agencies?
That is, the ratio is the ratio of the company's statutory surplus to the Company Action Level of surplus for that company. We believe the major ratings agencies expect an insurer to have an RBC ratio of 3.5 or higher to be rated AA.
What are credit spreads (also known as default spreads)?
Credit risk (also called default risk) is the risk that borrowers will not repay their loans
US Treasuries have no default risk- they are risk free investments.
All other investments have a risk of default, and investors are compensated for taking this risk by earning a risk premium- a higher interest rate.
The difference between yields on corporate bonds and Treasury yields is called the default spread or credit spread.
Default spreads rose to levels previously unseen in late 2008 in the financial crises.