A301 P5

Question 1

Coupon

Answer 1

The interest payments on a bond.

Question 2

Covenant

Answer 2

An agreement that is legal and binding on the parties involved.

The expression is often used in association with corporate debt, because the borrower is bound to the terms of the agreement.

The expression is also used in property investment because the tenant or lessee is bound to the terms of the lease agreement.

In fact the meaning of covenant has been extended in the context of property investment so that it usually refers to the quality of the tenant.

Question 3

Credibility

Answer 3

A measure of the weight to be given to a statistic.

Often refers to the experience for a particular risk compared to that derived from the overall experience of a corresponding parent or larger population.
The measure is used to determine a premium when using experience rating.

Question 4

Credit rating

Answer 4

A rating given to a company’s debt by a credit-rating company as an indication of the likelihood of default.

Top rating is usually AAA. Credit ratings are much used.

Question 5

Credit risk

Answer 5

The risk that the counterparty to an agreement will be UNABLE OR UNWILLING TO MAKE PAYMENTS required under the agreement.

Question 6

Custodian

Answer 6

The keeper of security certificates and other assets on behalf of investors.

Question 7

Debenture

Answer 7

A loan made to a company which is SECURED AGAINST THE ASSETS of the company so that the debenture holders rank above other creditors should the company be wound up.

Debentures with fixed charges are called mortgage debentures.

Question 8

Deferred member

Answer 8

A member of a benefits scheme who is no longer accruing benefits
but
who has accrued benefits that will be payable at a future date.

Question 9

Deficit

Answer 9

Where a benefits scheme or financial product provider has LESS ASSETS THAN REQUIRED by the funding plan to meet the liabilities.

Question 10

Defined ambition scheme

Answer 10

A scheme where RISKS ARE SHARED between the different parties involved, 
for example
- scheme members,
- employers,
- insurers and
- investment businesses.

Question 11

Defined benefit scheme

Answer 11

The benefits scheme where the scheme rules define the benefits INDEPENDENTLY of the contributions payable,
and benefits are not directly related to the investments of the scheme.

The scheme may be funded or unfunded.

Question 12

Defined contribution scheme

Answer 12

A scheme providing benefits where the amount of an individual member’s benefits depends on

• the CONTRIBUTIONS paid into the scheme in respect of that member
• increased by the INVESTMENT RETURN earned on those contributions.

Question 13

Depreciation

Answer 13

An accounting convention whereby firms write down the value of their assets over time.

Question 14

Derivative instrument

Answer 14

A financial instrument with a value dependent on the value of some other, underlying asset.

Question 15

Discounted income model

Answer 15

A model for valuing investment which determines a present value for the investments by discounting the expected future income from the assets.

Question 16

Dividend yield

Answer 16

The running yield on an equity.

dividends divided by share price

Question 17

Duration

Answer 17

The duration of a conventional bond is the
MEAN TERM OF THE PAYMENTS from the stock,
where each term is weighted by the present value of that payment.

Question 18

Early leaver

Answer 18

A person who ceases to be an active member of a benefit scheme, other than on death, without being granted an immediate retirement benefit.

Question 19

Economic value added

Answer 19

The percentage difference between

• the annual return on capital and
• the weighted average cost of capital.

Question 20

Efficient frontier

Answer 20

an efficient portfolio is one for which it is not possible to increase the expected return without accepting more risk and not possible to reduce the risk without accepting a lower return.

The efficient frontier is the line joining all efficient portfolios in risk-return space.

In portfolio theory, risk is defined as variance or standard deviation of return.

Question 21

Efficient market hypothesis

Answer 21

A hypothesis that asset prices reflect all relevant information.

Question 22

Embedded value

Answer 22

It represents the value to shareholders of the FUTURE PROFIT STREAM from a company’s existing business
together with the value of any net assets separately attributable to shareholders

Question 23

Emerging Market

Answer 23

Stock markets in developing countries such as China, Mexico, Singapore etc.
They offer high expected returns due to rapid industrialisation.
They are also very risky markets.

Question 24

Equity in investment

Answer 24

Ordinary shares issued by a company as a share in the equity capital of a company.

In effect, the equity holders are the owners of the company.
Ordinary shareholders have the right to receive all distributable profits of the company after debtholders and preference shareholders have been paid.
They also have the right to attend and vote at general meetings of the company.

Question 25

Equity in life insurance

Answer 25

It means all the policyholders are treated fairly.

That is, that some groups of policyholders do not benefit at the expense of other groups.

In a proprietary company, equity also needs to be considered between policyholders and shareholders.

Questions of equity arise in the distribution of surplus, in the determination of variable charges and in the determination of surrender values and alteration terms.

Question 26

Exclusion

Answer 26

An event, peril or cause defined within the policy document as being BEYOND THE SCOPE of the insurance cover.

Question 27

Experience Rating

Answer 27

A system by which the premium of each individual risk depends, at least in part, on the actual claims experience of that risk (usually in an earlier period, but sometimes in the period covered).

Question 28

Exposure

Answer 28

1. The state of being subject to the possibility of loss
2. A measure of extent of risk.
3. The possibility of loss to insured property caused by its surroundings.

Question 29

Extra premium

Answer 29

An addition to the standard premium payable under a contract in order to cover an extra risk.

Question 30

Extra risk

Answer 30

An extra risk arises where a proposal for life insurance is not acceptable at standard rates.

Question 31

Final salary scheme

Answer 31

A defined benefit scheme where the benefit is calculated by reference to the final earnings of the member, and usually also based on pensionable service.

Question 32

Financial gearing

Answer 32

Used to refer to the impact on the profits for a company caused by fixed-interest borrowing.

For a financially highly geared company, a small change in the total profits might have a very large proportionate impact on the profits for shareholders.

A company with lots of fixed-interest borrowing is highly geared.

Question 33

financial strength of a life insurance company

Answer 33

The ability
- to withstand adverse changes in experience, including those arising from investment in higher yielding but more volatile assets
- to fulfill its new business plans
- to meet the reasonable expectations of its policyholders.
and is often measured by the level of its free assets.

Question 34

Flexible benefits

Answer 34

benefit provision under which the beneficiary has choice about the types of levels of benefits to be received.

Will usually involve an option to receive salary instead of other forms of benefits.

Question 35

Floor

Answer 35

A lower limit.

for example on a benefit, a contribution, benefit growth or a funding level.

Question 36

Free assets

Answer 36

That part of a life insurance company’s assets that are not needed to cover its liabilities.

Opinion differs as to what should be included in the liabilities.