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Flashcards in Chapter 8 Deck (65):

What are institutional investing?

the professional management of money that belongs to other- individuals, corporations, and governments.


Staff in investment operations conduct investment management. What is this?

it consists of all the activities performed to invest a company's excess cash, generally in long-term investments.


What is included in an investment policy?

1. insurers investment objectives
2. types of investments needed
3. minimum standards for the safety of the principal invested and for the level of investment earnings
4. types of risks that investment staff can and cannot take in making investments
5. Max amount of money that each level of investment staff can authorize for an investment without having to seek approval from a higher level of authority within the company
6. regulatory constraints on the insures' investment activities


What are the 4 primary insurer's investment objectives?

1. create investment portfolios with cash flow properties that are consistent with the insurer's assets/liability management strategy
2. meet obligations to policy owners
3. contribute to the growth of earnings and surplus
4. maintain an adequate interrest spread.


what is interest spread?

the difference between the rate of return the insurer earns on the investment and the interest rate credited to products on behalf of customers.


what is risk-return trade off?

relationship between risk and return. Ideally the greater the risk associated with an investment, the greater the expected return. Assuming all other factors remain equal


Define principal

the amount originally invested .


What is the required rate of return equation

is the sum of the risk-free rate of return and the risk premium for any given investment.
RRR= Risk-Free + Risk premium


define the risk-free rate of return

the return on a risk-free inestment- the least risky investment oppertunity avialable.


what is risk premium?

the compensation that investors demand for taking on the risk associated with a specific investment. Without this, investors would be better off investing in a risk-free investment.


How can a country that does not have a risk-free investment, estimate risk-free rates of return?

estimated by using the average long-term growth rate of the country's economy.


how do you arrange buy-and-hold strategy?

investment staff carefully select securities and expect to hold them for long periods, or until they mature, are prepaid or default.


what happens under an active management strategy?

investment staff view any investment in a portfolio as potentially tradable, if trading the investment would improve the portfolios performance.


Are most insurance company's investment strategies buy-and-hold or active management?

they tend to fall between the two extremes.


What factors are generally considered by a portfolio manager, when evaluating specific investment?

1. investments cash flow patterns
2. investments expected rate of return or yield.
3. risks characteristics of the investments
4. liquidity of the investment
5. general economic conditions,
6. regulatory requirements that constrain the insurer's investment activities.


define investment activity report

specifies the details of all portfolio transactions


what the purpsoe of a quaterly investment portfolio performance review?

summerizies the insurer's investment performance for the board of directors and the investment commitee. TT


What do you call a security that represent an obligation of indebtedness?

debt security


what is a bond?

a debt security in which an investor lends money to a corporation or government that borrows the funds for a defined period of time at a fixed interest rate.


What do you call a security that represents an ownership interrest?

equity security.


What happens during a public offering?

the security inssuer makes a new security available for sale to the public, and usually an investment bank facilitates the offering, by havig it go thorugh a network of securities brokers and dealers.


Does a government agency need to be registered with the security?

yes, such as the SEC in the US.


what is required on the security registration document?

1. type of security being offered
2. issuing company's :financial condition, management, industry competition and experience.


What is the preferred way for insurers and other large institutional investors to purchase new issues of securities? how?

private placement,
the issuer sells the security directed to a limited number of investors, typically institutional investors.
these do not have to be registered with government agencies.


What is securities exchange?

a market in which buyers and sellers of securities, meet in one location to conduct trades. IE. NY stock exchanges.


What is the over-the-counter market?

an electronic comminications network over which securities that are not bought and sold on an exchange are traded.


Name one network that is a well-known OTC market for stock.

NASDAQ- the national association of securities dealers automated quotation systems.


Insurance company's assets are maintained in two primary types of investment portfolios. Name them

General account portfolio and seperate account portfolios


All insurers have a general account- what is this?

an asset portfolio that supports a life insurers contractual obligations to owners of guaranteed products, such as traditional whole life insurance and fixed annuities.
they are usually in fixed-income investments


what is a fixed-income investment?

provide a predictable stream of income. ex bonds and mortages.


In the US, there are g/l when selecting general account investments. These require insueres investment portfolios to be diversified and composed of high-quality assets, with low risk levels. Name the two general forms.

1. imposed quantitative limitations on the amount of each type of asset an insurer may treat as admitted assets.
2. imposed a prudent person approach that rather than placing quantitative limits on insurer investments, it requires an insurer to act as a prudent person would when making decision about which assets to include in its investment portfolio.


Insueres that offer variable products maintain one or more separate account portfolios- what is this?

AKA: segregated funds account.- is one or more asset portfolios that support an insurer's variable products, such as variable life insurance policies and variable annuities.


Separate accounts are divided into various subaccount. What are these?

they consist of pools of investments with distinct investment strategies. Based on their investment goals, and tolerance for risk.


how does the insueres manage the purchase and sale of assets in the subaccounts?

according to the customers allocation decisions.


Are investments held in an insuere's separate account subject to the same regulatory restrictions as the investments in the general account?



assets in an insurers' portfolio can be classified generally according to whether the assets represent equity or debt. Insurance companies primarily invest in what 5 kinds of financial securities?

1. bonds
2. mortgages
3. stocks
4. real estate
5. policy loans


what is the amount owed specificly on the bond called?

par value0


in addition to repaying the bond, what else is required of the bond issuer to the bondholdeR?

interrest payments. These are called coupon payment.


What is the coupon rate?

the amount of the interest payments is based on an interest rate-


how can a bondholder earn return?

1. the receipt of coupon payments
2. capital gain upon the sale of the bond before it matures


what is capital gain?

the amount by which an investment is sold for more than its purchase price


what is capital loss?

when the amount by which an investment si sold for less than its purchase price.


are bond prices and interest rates inversely related? why

yes. As interest rates rise, bond prices fall.


which characteristics of a bond, determine the degree of risk it presents to the purchaser.

these characteristics include the bond's term to maturity, default risk, bond rating, call provision, convertibility, and collateral .


Define a bonds term to maturity

its the length of time until the bond matures. bonds with longterm to maturity are more susceptible to interest-rate risk than bonds with short term maturity.


Define a bonds default risk

its the risk that a bond issuer will be unable to make interest payments when these payments are due or to pay the par value when it matures.


Define bond ratings

the letter grade that a bond rating agency assigns to indicate the quality of a bond issue.


true or false: the higher the bond rating the higher the default risk.

false, the lower the default risk, and the higher the bond rating the safer the bond investment, and lower expected rate of return.


what is a call provision, present on some bonds?

it states the conditions under which the bond issuer has the right ti require the bond holder to sell the bond back to the issuer at a date earlier than the maturity date.
When and how much a bond is when its called.
they usually have higher coupon rates


What is a convertible bond?

it can be exchanged for shares of the issuing company's common stock at the option of the bondholder.
they typically have lower coupon rates


what is the name given to bonds that are rated in a higher category such as Baa (moody's) or BBB (standars & poor) and that have the lowest risk of default?

investment-grade bond.


what are the bonds called that are rated in the categories below investment grades?

high-yield bonds or junk bonds.


define collateral

an asset that is plefged as security for a loan until the debt is paid.


what is another name for unsecured bonds?

debentures- they are not backed by collateral.
tend to have higher coupon rates


Bond are typically divided into 2 categories. Name and define them

1. corporate: usually very large corporations, and can be secured, unsecured and many are callable.
2. Government bonds- used to generate funds for government expenses, loan programs, or large prodcuts.


what are the 3 common types of government bonds in the states?

1. federal government
2. agency bonds
3. municipal


what is a mortgage?

a long-term loan, secured by a pledge of specified property that the borrower agrees to pay off with regular payments of principal and interrest. ``


what is amortization,

the reduction of a debt by regular payments of principal and interest that results in full payments of the debt by the maturity date.


Are mortgages considered fixed-income investments?



what makes a mortgage investment risky?

1. they are resold less often than bonds. (less liquidable)
2. changing market interrest rates
3. at risk that the dabtor may default and not repay loan- and evaluating the default risk a mortgage presents is difficult.


what is a collateralized mortgage obligation?

where a bond is secured by a pool of residential mortgage loans.
- no longer a common investment since the worldwide financial crisis that began in 2007-2008.


What is common stock?

type of stock that entitiles its owners to share in the company's dividend payments. (possibly through cash or additional stock dividends)


what is sale-and-leaseback transactions in terms of real estate investment?

the owner of a building sells the building to an investor- (insurance company) but immediately leases back the building from the investor.


What is a policy loan?

the loan a life insurance compnay makes to the owner of a life insurance policy that has cash value. The interrest rate for the loan is relatively low.


how do life insurance loans differ from other insurance company investments?

1. cant control timing of policy loan
2. they do not require the borrower to make systemativ payments to repay the loan
3. they do not have contractual maturity dates.