Assume that there are two types of borrowers high and low. The high type occurs with probability 0.75 and the low type occurs withprobability 0.25. The high type succeeds and generates a gross return of 2 with probability 0.8 and fails and generates a gross returnof 0 with probability 0.2. The low type succeeds and generates a gross return of 10 with probability 0.2 and fails and generates a grossreturn of 0 with probability 0.8. Assume limited liability. In addition, assume that the two types of potential borrowers areINDISTINGUISHABLE. What do you expect to happen if a commercial bank chooses to charge a gross interest rate of 1.5 to apotential borrower?O Both types will applyO Only the low type will applyO Neither type will applyO Only the high type will apply

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Answered: Assume that there are two types of…

A First Course in Probability (10th Edition)

10th Edition

ISBN:9780134753119

Author:Sheldon Ross

Publisher:Sheldon Ross

Chapter1: Combinatorial Analysis

Section: Chapter Questions

Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...

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Which of the following statements is CORRECT? O a. One drawback of the payback criterion is that this method does not take account of cash flows beyond the payback period. Ob. The shorter a project's payback period, the less desirable the project is normally considered to be by this criterion. OcOne drawback of the discounted payback is that this method does not consider the time value of money, while the regular payback overcomes this drawback. Od. If a project's payback is positive, then the project should be accepted because it must have a positive NPV. Oe. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.
In which section of the statement of cash flows would each of the following transactions be included? For each, identify the appropriate section of the statement of cash flows as operating (O), investing (I), financing (F), or none (N). (Note: some transactions might involve two sections.) purchased stock in Xerox Corporation purchased office supplies issued common stock sold plant assets for cash sold equipment for cash
A life insurer issued a special endowment insurance policy to a life aged 35, with term 5 years. The death benefit payable at the end of the year of death, is equal to £1, 000 plus the reserve that would have been held at the end of the year had the policyholder been alive. The maturity benefit (benefit paid at maturity if the policyholder still alive) is £1, 000. The premium is £200, payable annually in advance. The basis is AM92 ultimate life table and the interest is 4% per annum. (a) Find the reserve just before the payment of the 3rd premium by using the recursive relation between reserves. (b) Find the policy value at issuance using the same recursive method as above. (c) Explain why your answer to (b) is not consistent with the equivalence principle and give two examples of how this may have arisen.
4. An insurer issues a 15-year annual premium-due endowment insurance of $100,000 benefit to life (50). The insurer charges an initial expenses of $ 1000 plus renewal expenses of 5% of each subsequent premium after the first premium payment. The premiums are made at the beginning of each year when (50) remains alive before reaching 70 and the benefit is paid at the end of K50 +1 years or when the person reaches the age 70 whichever occurs earlier. (a) Write down the gross future loss random variable L in terms of actuarial notations. (b) Calculate the gross premium-due G by using the Standard Select Survival Model with 5 % per year interest (Table D4) and the equivalence premium principle. 8 (c) Calculate the gross premium policy value V by using the equivalence premium G found in (b).
An account that is established for accumulating funds to meet future obligations or debts is called a [Select] fund.
An insurer issued a large number of policies to people age 50. Each policy is a 30-year endowmentinsurance with a benefit of $100,000 and an annual gross premium of $2,500 payable for 20 years.The insurer’s reserving basis is:Standard Ultimate Life Table at 5% (the one that I distributed in class).Expenses are 20% of the first premium, 5% of subsequent premiums, $200 upon payment of deathbenefit, $50 upon payment of endowment benefit.Ten years after issue, a total of 100 of these policies were still in force (for people now age 60).In the following year:Expenses of 4% of each premium were incurred,interest of 4.5% was earned on all assets,one policyholder died, andexpenses of $150 were incurred on the payment of the benefit of the one policyholder that died.(a) Calculate the profit or loss on this group of policies for this year.(b) Determine how much of this profit/loss is attributable to interest, expenses and mortality (in thatorder)(c) Determine how much of this profit/loss is…
Although there is no empirical evidence to strongly support this hypothesis, some financial journalists have claimed that British managers are short-sighted and overly risk averse, preferr ing to take on relatively safe projects that pay off quickly instead of taking on longerterm projects with less certain pay-offs. Assume the journalists are correct.a Explain why managers who use a single discount rate for valuing projects are likely to have a systematic bias against longer-term projects if the systematic risk of the cash flows of many long-term investment projects declines over time.b Discuss how the presence of strategic investment options affects the decisions to adopt long-term over short-term investments. Can you help with the understanding of question a and b
A rent-to-own agreement allows the renter to either return the merchandise after a specified period of time or apply the monthly payments toward purchasing the item(s) (or clearly, the renter could default on the agreement). A rent-to-own company reports that nationally 60% of the agreements result in the merchandise being returned, 27% of the agreements result in the merchandise being purchased, and the remaining agreements are defaulted on (consumer does not make required payments specified in the contract). At a local rent-to-own company, a sample of 229 agreements finds that 110 result in the merchandise being returned, 74 agreements result in the merchandise being purchased and the remaining agreements are defaulted upon. When testing (at the 5% level of significance) whether the proportions of the local company are different than the proportions nationally, what is the test statistic (please round your answer to 3 decimal places)

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