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Chapter 2: Q.21 (page 97)

Why would a life insurance company be concerned about the financial stability of major corporations or the health of the housing market?

Short Answer

Expert verified

They are concerned because a large share of income is spent on buying shares, bonds, equities and debentures.

Step by step solution

01

Step 1. Introduction

An asset refers to any resource that has economic value and is held with the motive to earn benefits in the future. Examples of assets are stocks, real estate, mutual funds, etc.

02

Step 2. Explanation

The life insurance corporations are concerned about the financial stability because their main asset is financial assets of the company. The premium they receive from there customers are invested in the buying the financial assets such as bonds, equities etc. The health of these corporation depends upon the market stability and health of housing market.

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Most popular questions from this chapter

How can the adverse selection problem explain why you are more likely to make a loan to a family member than to a stranger?

One of the single best sources of information about financial institutions is the U.S. Flow of Funds report, produced by the Federal Reserve. This document contains data on most financial intermediaries. Go to http:// www.federalreserve.gov/releases/Z1/ and find the most current release. You may have to get Acrobat Reader if your computer does not already have it; the site has a link for a free download. Go to the Level Tables and answer the following questions.

a. What percentage of assets do commercial banks hold in loans? What percentage of assets is held in mortgage loans?

b. What percentage of assets do savings and loans hold in mortgage loans?

c. What percentage of assets do credit unions hold in mortgage loans and in consumer loans?

Describe who issues each of the following money market instruments:

a. Treasury bills

b. Certificates of deposit

c. Commercial paper

d. Repurchase agreement

e. Fed funds

Suppose a few investors are looking for an investment opportunity that will yield high returns. They are willing to invest in private securities instead of government bonds. However, their analyst found that currently most companies listed on the market and are actively trading in securities are in trouble, which would make them risky investments. What can you conclude from this situation? How would you advise the investors?

How do conflicts of interest make the asymmetric information problem worse?
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