Connect with Us!
CPCU 540 Practice Exam
Page 1 of 7
Which of the following represents the use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to business or government agencies?
A. Internet of Things (IoT).
C. Machine learning.
D. Data science.
Which one of the following statements is correct regarding the capital needs relating to an insurance company?
A. Insurers failing to meet the minimum risk-based capital standards for their state will be considered a candidate for seizure unless the problems are corrected within six months.
B. Insurance regulators are primarily concerned with an insurance company’s return on equity when determining if an insurer has sufficient capital.
C. Investors will provide capital to an insurer if their expected return on their investment is no less than the return on alternative investments with the same degree of risk.
D. An advantage of using a risk-based capital system for determining sufficient capitalization of insurers is that it treats all services lines equally.
The National Association of Insurance Commissioners (NAIC) has developed a system to determine the minimum capital required for an insurer to continue its existing operations based on its level of risk. The system developed by the NAIC is the:
A. Capital Budgeting Model.
B. Risk-Based Capital System.
C. Insurance Regulatory Information System.
D. A.M. Best Financial Strength Rating.
What is the main reason liability insurers generally have a greater rate of return on their investments than the return received by property insurers?
A. Regulatory restrictions on property insurers limit the rate of return on fixed income investments.
B. Statutory accounting requires property insurers to reduce investment income by inflation.
C. Funds generated by long-tail lines are available for a longer period of time.
D. Cash matching is only available to liability insurers.
A company’s dividend policy decision considers several factors. Which one of the following factors would most likely cause a company to retain earnings as opposed to paying a dividend?
A. The company’s expected return from available investments is higher than the expected return on investments available to shareholders.
B. The company is concerned about investor’s attitudes toward uncertainty.
C. The company would like to send a positive signal to the investment market in an attempt to increase the price of the stock.
D. The company has steady free cash flow and can easily secure external capital if needed.
Which one of the following ratios measures the extent to which an insurer can meet its obligations as they come due?
A. Combined ratio.
B. Capacity ratio.
C. Operating ratio.
D. Liquidity ratio.
The profitability of a company is calculated on which one of the following financial statements?
A. Balance Sheet.
B. Statement of Cash Flows.
C. Income Statement.
D. Statement of Changes in Shareholders’ Equity.
Which one of the following represents the rate of return earned by a bond, adjusted for inflation?
A. Real rate of return.
B. Nominal rate of return.
C. Coupon rate.
D. Yield to call.
In which of the following situations would a company be required to file Form 8-K with the SEC?
A. The company purchased fixed assets in excess of $10,000,000 in the most recent quarter.
B. The company is involved in litigation.
C. The company has changed its auditor certifying the financial statements.
D. The company has a public float of at least $75,000,000.
Which one of the following investments would be best to match an insurer’s investment portfolio maturity to the insurance company’s expected loss payments?
A. U.S. Treasury securities.
B. Low beta stocks.
C. Zero-coupon bonds.
D. Corporate bonds.
Page 2 of 7
A mutual insurance company is owned by:
A. State regulators.
B. Policy owners.
Which one of the following sets of ratios addresses the risk of mismatched cash flow from assets and liabilities?
A. Leverage ratios.
B. Liquidity ratios.
C. Efficiency ratios.
D. Profitability ratios.
Which one of the following represents a consideration relating to a company’s dividend policy?
A. The amount of time the company has conducted business operations.
B. The amount of reinsurance ceded by the company.
C. The size of the dividend paid in the previous quarter.
D. The company’s access to external sources of capital.
Which one of the following represents a main goal of corporate finance?
A. Maximizing shareholder value.
B. Submitting appropriate reports to the SEC.
C. Minimizing a company’s taxable income.
D. Reducing transparency in financial reporting.
A city in California is issuing bonds to build a toll bridge. Interest payments made by the city on the bonds will be payable from the tolls collected from the bridge. Which one of the following types of bonds were issued by the city?
A. General obligation bonds.
C. Revenue bonds.
A measure of the total rate of return a bondholder will receive if they hold the bond until it is worth its $1,000 par value is referred to as its:
A. Coupon yield.
B. Yield to call.
C. Yield to maturity.
D. Current yield.
Which one of the following statements is correct regarding the A. M. Best rating scale applicable to insurers?
A. The Financial Size Category (FSC) is used to measure an insurer’s financial performance.
B. A Financial Strength Rating (FSR) of “B” would indicate an insurer that is vulnerable.
C. A Financial Strength Rating (FSR) of “S” would indicate an insurer that is secure.
D. A Class I insurer is considered a large insurer as measured by adjusted surplus.
The concept of converting a known future value and converting it into a present value is referred to as:
Comprehensive income is a measure of income that goes beyond that reported on the income statement by including items such as:
A. Income taxes.
B. Unrealized gains and losses.
C. Paid-in capital and retained earnings.
D. Sales and cost of goods sold.
Which one of the following ratios is considered an efficiency ratio?
A. Current ratio.
B. Inventory turnover.
C. Return on assets.
D. Return on equity.
Page 3 of 7
Which of the following represents the ratio of a company’s dividends to the company’s earnings?
A. Dupont identity.
B. Dividend payout ratio.
C. Debt-to-equity ratio.
D. Current ratio.
The controller of a corporation is responsible for which of the following functions?
A. Financial reporting, capital structure management, and taxation.
B. Taxation, financial accounting, and financial reporting.
C. Financial accounting, capital budgeting, and working capital management.
D. Working capital management, capital structure management, and capital budgeting.
Which one of the following statements is correct regarding municipal bonds?
A. They are issued by the United States Treasury.
B. They offer a higher rate of return than a similar corporate bond.
C. They are offered and issued outside the issuer’s country of origin.
D. They pay interest income that is not subject to federal income taxation.
A main goal of corporate finance is maximizing shareholder wealth. Which one of the following best describes this goal?
A. Maximizing corporate dividends.
B. Maximizing working capital.
C. Maximizing the value of corporate stock.
D. Maximizing company net profits.
A.M. Best’s Financial Strength Rating (FSR) begins with a detailed review of several key rating factors. Which one of the following represents a key rating factor?
A. Qualitative significance.
B. In-force policies.
C. Yield on invested assets.
D. Enterprise risk management.
Under statutory accounting principles, which one of the following would be considered an admitted asset on an insurance company’s balance sheet?
D. Prepaid expenses.
If an insurance company changed its financial statements to report items at their fair market value rather than their historical cost, what would be the effect on the company’s balance sheet and income statement?
A. The balance sheet would change, but the income statement would remain the same.
B. The income statement would change, but the balance sheet would remain the same.
C. Both the balance sheet and income statement would change.
D. Both the balance sheet and income statement would remain the same.
Under the Risk-Based Capital System, which one of the following risks pertains to changes in an asset’s price on an insurer’s balance sheet?
A. Balance sheet risk.
B. Asset risk.
C. Credit risk.
D. Underwriting risk.
Which one of the following bond provisions permits the issuing company to pay off the bond prior to maturity if interest rates fall?
A. Convertibility provision.
B. Floating rate provision.
C. Call provision.
D. Sinking fund provision.
Which one of the following best describes the difference between financial statements prepared under generally accepted accounting principles (GAAP) and those prepared using international financial reporting standards (IFRS)?
A. GAAP financial statements report all long-term assets at their current fair market value, while IFRS financial statements report all long-term assets at their historical cost.
B. GAAP financial statements are prepared under the accrual basis of accounting, while IFRS financial statements are prepared under the cash method of accounting.
C. GAAP financial statements are prepared under the going-concern assumption, while IFRS financial statements are prepared under the liquidation assumption.
D. GAAP financial statements maintain a more rules-based approach, while IFRS financial statements maintain a more principles-based approach.
Page 4 of 7
What accounting standards does a publicly-traded property and casualty insurance company follow for its financial statements?
A. They are required to file financial statements using statutory accounting principles (SAP) but are not required to file financial statements using generally accepted accounting principles (GAAP).
B. They are required to file financial statements using SAP and are also required to file financial statements using GAAP.
C. They are required to file financial statements using GAAP but are not required to file financial statements using SAP.
D. They are not required to file financial statements using GAAP, and they are not required to file financial statements using SAP.
A difference between an insurance company’s investment income ratio and its investment yield ratio is that the investment yield ratio:
A. Includes net realized capital gains from the sale of investments.
B. Excludes rent payments from the definition of investment income.
C. Accounts for an insurance company’s reserves when determining portfolio yield.
D. Focuses predominantly on short-term investments.
Which one of the following represents a risk that is avoided with zero-coupon bonds?
A. Price risk.
B. Interest rate risk.
C. Default risk.
D. Reinvestment risk.
Which one of the following reports is submitted to the SEC on an annual basis?
A. Form 10-K.
B. Form 10-Q.
C. Statement of Shareholders’ Equity.
D. Form 8-K.
Chuck has determined that there is a 90% chance he will not lose more than $150,000 in one day on his investment. What measure is being used for Chuck’s investment?
A. Standard deviation.
B. Coefficient of variation.
C. Value at risk.
IMW Insurance Company recently issued bonds to bond investors with the provision that the payment of interest will be suspended in the event of a hurricane. IMW Insurance Company has issued:
A. Bearer bonds.
B. Adjustable bonds.
C. Serial bonds.
D. Catastrophe bonds.
ABC Insurance has excessive long-term debt as a liability on their balance sheet. When can this be a positive?
A. If interest rates rise in the future.
B. If interest rates fall in the future.
C. If the company plans on acquiring another company.
D. If a catastrophe such as a hurricane occurs.
Which one of the following types of risk best describes the risk of holding an individual security?
A. Unsystematic risk.
B. Systematic risk.
C. Reinvestment risk.
D. Interest rate risk.
An insurer experiences an increase in their loss reserves during the year. What impact will this have to the insurer?
A. Net income will be increased.
B. Income taxes due will be increased.
C. Claim payments will be reduced.
D. Expenses will increase.
Which one of the following statements is correct regarding cumulative preferred stock?
A. It allows the holder to convert it to a stated number of common stock shares of the issuing company.
B. It takes precedence over corporate creditors regarding liquidation payments.
C. It pays dividends to shareholders that are tax-deductible for the paying corporation.
D. It gives the holder the right to receive accrued unpaid dividends before dividends are paid to common stock shareholders.
Page 5 of 7
A company will issue $2,000,000 of bonds, paying a 7% coupon rate. The issue of these bonds will decrease the cost of capital due to the:
A. Cost of financial distress.
B. Increased cash flow flexibility.
C. Tax shield.
D. Additional cost of high debt.
Which of the following statements is correct regarding the comparison of corporate bonds and Treasury bonds?
A. Corporate bonds have a larger minimum initial investment than Treasury bonds.
B. Corporate bonds have a lower yield as compared to Treasury bonds.
C. Only corporate bonds pay a coupon payment.
D. Corporate bonds have longer maturities than Treasury bonds.
Where would a premium that is 90 days late in being paid by the insured be reflected on an insurance company’s statutory financial statements?
A. As a liability on the company’s balance sheet.
B. As an admitted asset on the company’s balance sheet.
C. As a nonadmitted asset on the company’s balance sheet.
D. As an adjustment on the company’s Statement of Comprehensive Income.
The Risk-Based Capital System was developed by the National Association of Insurance Commissioners (NAIC) for what purpose?
A. To provide a ranking of an insurance company’s financial strength.
B. To determine if an insurance company can pay its claims.
C. To evaluate the investments of an insurance company.
D. To ascertain the intrinsic value of an insurance company.
Which one of the following statements is correct regarding financial intermediaries?
A. Property-casualty insurers are the most prominent financial intermediaries.
B. A financial intermediary is a mechanism by which newly-issued securities are sold, with the proceeds going directly to the issuer.
C. The claims produced by financial intermediaries are often less liquid than the financial claims issued directly by corporations.
D. A benefit of financial intermediaries is that they match parties with disparate needs.
Which one of the following represents a reason why the National Association of Insurance Commissioners (NAIC) requires insurers to produce an Own Risk and Solvency Assessment (ORSA)?
A. It forces insurers to spend time every year considering how best to manage their own loss risks.
B. It encourages sensible risk management strategies without restricting insurer growth or profitability.
C. It allows the NAIC to identify insurers that facing insolvency.
D. It reduces the number of risky investments that insurers purchase.
Which one of the following items may not be fairly represented on a company’s balance sheet due to the cost principle of accounting?
C. Notes payable.
D. Reinsurance recoverables.
ABC Company reports the value of their office building on their balance sheet at historical cost less depreciation. This is consistent with the GAAP concept of:
Asset classes are organized into two broad categories on the balance sheet of the National Association of Insurance Commissioners (NAIC) Annual Statement. These are:
A. Current assets and non-current assets.
B. Liquid assets and illiquid assets.
C. Invested assets and non-invested assets.
D. Stocks and bonds.
Which one of the following is evaluated when A.M. Best is reviewing an insurer’s business profile?
B. Investment return.
C. Ability of management.
D. Earnings history.
Page 6 of 7
Insurtech data storage is enabled by:
C. Smart products.
RonCo recently raised capital by selling their common stock in an initial public offering. They also issued debt securities. After the issue, the stock and debt securities trade in the:
A. Secondary market.
B. Primary market.
C. Private placement market.
D. Auction market.
KLM Insurance Company had the following information from their most recent financial statements:
Earned Premiums – $5,800,000
Written Premiums – $6,000,000
Underwriting Expenses – $1,100,000
Incurred Losses and LAE – $5,700,000
What was KLM Insurance Company’s combined ratio?
Stayco, a small company, experienced a fire that completely destroyed inventory and current accounting records. A recent report issued by the company immediately before the fire revealed the following:
Sales – $400,000
Gross profit percentage – 25%
Beginning inventory – $50,000
Additions to inventory during the year – $370,000
What is the amount of their ending inventory destroyed by the fire?
A company’s stock experienced the following rates of return:
Year 1: 10.5%
Year 2: 18%
Year 3: 12%
Year 4: -5% F
or purposes of calculating the variance and standard deviation of the stock, the average return for this stock is:
XYZ Company has the following:
Sales – $400,000
Cost of Goods Sold – $300,000
Inventory – $200,000
Accounts Receivable – $50,000
What is the inventory turnover ratio for XYZ Company?
Janice is interested in purchasing preferred stock to add to her investment portfolio. She has identified a preferred stock that pays a $2.50 annual dividend per share. If Janice has an 8% required rate of return on her investment, what would she be willing to pay to purchase one share of the preferred stock?
XYZ Company has the following:
Cash – $300,000
Marketable Securities – $200,000
Accounts Receivable – $100,000
Inventory – $800,000
Long-term Investments – $2,000,000
Current Liabilities – $750,000
What is the quick ratio for XYZ Company?
An investor currently has an investment in only one stock (Stock A). He would like to build a diversified portfolio to minimize risk and is considering purchasing a second stock (Stock B) and/or buying bonds. Which one of the following would be the best strategy for the investor?
A. Sell Stock A and purchase Stock B.
B. Sell Stock A and purchase bonds.
C. Keep Stock A and purchase Stock B.
D. Keep Stock A and purchase both Stock B and bonds.
An insurance company has historically sold property and casualty insurance but will begin selling liability insurance. How will the sale of liability insurance affect the company’s leverage?
A. Insurance leverage will decrease.
B. Insurance leverage will not be affected.
C. Financial leverage will decrease.
D. Insurance leverage will increase.
Page 7 of 7
ABC Company has the following income and expenses:
Sales - $400,000
Cost of Goods Sold – $300,000
Operating Expenses – $50,000
Investment Income – $15,000
Investment Expenses – $12,000
Income Taxes – $18,000
What is the gross profit for ABC Company?
An investor sold his entire portfolio of individual stocks and used the sales proceeds to purchase index funds. Based on this investment strategy, the investor believes in:
A. Fundamental analysis.
B. Weak form efficient market hypothesis.
C. Strong form efficient market hypothesis.
D. Technical analysis.
If a company purchases its own stock as treasury stock, how will this affect the company’s financial statements?
A. The company’s investment income will increase on the income statement.
B. The company’s total assets will increase on the balance sheet.
C. The company’s shareholders’ equity will decrease on the balance sheet.
D. The company’s expenses will decrease on the income statement.
Marybeth would like to accumulate $5,000 at the end of 12 months. Assuming she can earn a 5% rate of return on her savings, compounded quarterly, how much does she need to set aside today to achieve her goal?
Company X and Company Y both have a return on assets (ROA) of 15%, and they both have the same amount of total assets. However, the net profit margin for Company Y is higher than the net profit margin for Company X. The probable reason for this is because:
A. Sales for Company X are lower than sales for Company Y.
B. Company Y had a net loss for the year, while Company X had a net profit.
C. Company X had a higher amount of net income than Company Y.
D. Sales for Company Y are lower than sales for Company X.
ABC Company has the following assets and liabilities:
Cash – $50,000
Accounts receivable – $125,000
Inventory – $2,000,000
Equipment – $15,000,000
Accounts payable – $1,500,000
Long-term debt – $8,000,000
What is the amount of working capital for ABC Company?
Which one of the following expenses would most likely be the highest on the cash flow statement of a consulting firm?
A. Losses and loss adjustment expenses.
B. Cost of goods sold.
C. Salaries and benefits.
Sitwell Industries has the following information:
Sales – $30,000
Cost of Goods Sold – $22,000
Selling, General, and Administrative Expenses – $6,000
Income Taxes – $1,000
What is the net profit margin percentage for Sitwell Industries?
Which one of the following would result in the highest effective rate?
A. 4.00% nominal rate compounding daily.
B. 4.10% nominal rate compounding quarterly.
C. 4.15% nominal rate compounding monthly.
D. 4.17% nominal rate compounding annually.
A company issued stock as follows:
1,000 shares issued.
$10 per share issue price.
$1 per share par value.
What is the amount of Additional Paid-in Capital that will be reported on their balance sheet?