Joe Owned a House That Would Cost $200,000 to Replace

question 74

Essay

Joe owned a house that would cost $200,000 to replace. He took out an insurance policy for only $100,000, reasoning that any damage that would take place would likely be under that amount. In fact, there was a fire and the total loss was $50,000. Indicate what problems Joe might run into when he tries to collect.

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Definitions:

Premium Amortization

The gradual expense or reduction of the premium paid above the par value of a debt security over its remaining term.

Interest Expense

The charge an entity bears for the funds it has borrowed over a set period.

Market Rate

The current price at which an asset or service can be bought or sold in a particular market.

Coupon Rate

The interest rate stated on a bond or other fixed-income security, expressed as a percentage of its face value.