Consider the Simplified Payment System to Compensate the Victims of 9/11

question 70

Multiple Choice

Consider the simplified payment system to compensate the victims of 9/11 for lost lifetime earnings:
• The family of a 65-year-old service worker earning $10,000 a year receives $300,000 in compensation.
• The family of a 30-year-old bond trader earning $175,000 a year receives $4.35 million.
Which statement most accurately describes the difference in the payments between the service worker and the bond trader?

• A) The present value of the bond trader's lifetime income is greater than the service worker's.
• B) Because of her age, the bond trader had less savings to rely on, so her family received more compensation.
• C) The future value of the bond trader's lifetime income is less than the service worker's.
• D) Such a discrepancy in compensation would never be the case.
• E) None of these answers is correct.

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Definitions:

Derivative Financial Instrument

A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indices.

Forward Exchange Contract

A financial agreement to exchange a specified amount of one currency for another currency at a future date and at a predetermined exchange rate.

Futures Contract

A standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future, often used as a financial instrument for hedging or speculation.

Option Contract

A contract which gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a specified time.