Assignment Task :

This assessment comprises 25% of your final assessment. Ten sample multiple choice questions and a typed response question, with solutions, are overleaf. 

Q1: Moral hazard is a. The risk that one party to a contract may change its behaviour to the detriment of the other party once a contract has been signed. b. A risk resulting from adverse selection. c. The risk that managers may not act in the interest of shareholders. d. A type of default risk. 

Q2: The problem created by asymmetric information before the transaction occurs is called ________, while the problem created after the transaction occurs is called ________. 

a. adverse selection; moral hazard b. moral hazard; adverse selection c. costly state verification; free-riding d. free-riding; costly state verification 

Q3: Which of the following is an off-balance sheet activity of commercial banks? 

a. Borrowed funds b. Loan c. Deposit d. Loan commitment 

Q4: Traditionally credit unions use their funds mainly for __________ and primarily fund them with _______. 

a. business loans; investment securities b. consumer loans; member deposits c business loans; commercial paper d. consumer loans; loans from banks 

Q5: Superannuation main source of funds is via: 

a. life insurance premiums. b. borrowings from wholesale markets. c. periodic contribution from members. d. borrowings from banks. 

Q6: Life insurance companies attract a large proportion of their funds through regular premiums from policy holders which is used primarily to invest in: 

a. equity investments b. treasury notes (< 1 year) c. government securities d. money market securities 

Q7: General insurance companies outflows are considered to be somewhat unpredictable. Given this, where would they most be likely to invest given the following investment options? 

a. equity investments b. residential property c. commercial paper (< 1 year) d. long-term securities 

Q8: If investors speculate in the underlying asset rather than derivative contracts, they will probably achieve ____ returns, and they are exposed to relatively ____ risk. 

a. lower; lower b. lower; higher c. higher; lower d. higher; higher 

Q9: Which of the following is a bank liability? 

a. Loans made by the bank b. Funds borrowed by the bank c. Investment securities owned by the bank d. Purchase of government securities 

Q10: Lower bank capital ________ the likelihood of bankruptcy, but lower bank capital ________ the return on equity for a given return on assets. 

a. reduces; reduces

b. increases; increases

c. reduces; increases

d. increases; reduces 

 

Question: Why are life insurance companies more likely to invest in longer- term securities compared to general insurance companies? 

The outflow of funds for life insurance are quite predictable and stable. Thus, they can assess with some degree of certainty the amount of money required in the short- term for paying out on claims. Given this relative certainty, life insurance companies will invest a greater proportion of their funds in longer-term securities in order to realise higher returns. 

Conversely, the outflow of funds for general insurance companies are typically less predictable. Hence, they will invest a larger proportion in shorter term, highly marketable securities in order to access funds quickly to meet claims against insurance policies. 

 

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