WRITTEN EXERCISES Find the proceeds of each of the following drafts, the rate of exchange being par. Use the exact number of days, and 360 days as 9. Find the cost of a sight draft for $7400 when exchange is at a premium of of 1%. 10. What is the cost of a sight draft for $4900 when exchange is at a discount of 2%? 11. A merchant in Denver buys a bill of goods for $14,300 in Chicago, discounts being 10% and 5% (see page 189). If exchange is at a premium of .15%, what must he pay for a draft with which to pay his bill? 12. An automobile company in Detroit sells machines to a western dealer for $35,800. The bill is payable in 90 days. He accepts the draft 75 days before it is due. What are the proceeds of the draft if the rate of discount is 5%? 13. If exchange on New York is at a premium of %, what is the face of a draft which can be bought for $20,000? 14. If exchange is at a discount of 2%, what is the face of a draft which can be bought for $3500? 15. A Chicago draft for $6500 is due in Salt Lake City in 120 days. It is accepted and discounted at Salt Lake City 112 days before it is due. What are the proceeds of the note, if the rate of discount is 8% ? 16. The proceeds of the draft in the preceding example are sent to Chicago by means of a bankers' draft bought at a premium of 35. What is the face of the draft? 17. A lumber company in Montana sells a bill of lumber to a firm in St. Paul for $28,400, payable in 90 days in St. Paul. Draft for this amount is accepted and discounted in St. Paul, at the rate of 6%, 83 days before it is due. What are the proceeds? 18. A New York broker sold a bill of goods for a St. Louis shipper for $24,500. After deducting 1% as his own commission, he remits the remainder to St. Louis. If exchange is at 15 discount, how much does the St. Louis shipper get? 409. Service of the Banks in Paying Bills at a Distance. - The full reason why payments are made by check, by bank draft, or by ordinary commercial drafts, is rather difficult to understand. We can acquire a partial comprehension of it, however, by studying a special case. Throughout the year breadstuffs and meats are being shipped east from the North Central States. At the same time, clothing, shoes, and other manufactured goods are being shipped into the North Central States from New England and the Middle Atlantic States. Each shipment is made on a separate order, and payment must be made for it. If cash were to be sent in both directions to pay for each shipment, an immense amount of cash would be shipped in both directions each month or even each day. Indeed, it would be perfectly possible to have millions in actual money shipped from New York to Chicago the same day that an equal number of millions were shipped from Chicago to New York. This waste of work and expense is saved by the banks. If merchants in Chicago owe one million to merchants in New York, and at the same time other merchants in New York owe a million to merchants in Chicago, the banks by means of their drafts enable both millions to be paid without transferring a single cent in cash. The net result is that if the total of the payments to be made by Chicago people in New York is about the same as the total of the payments to be made by New York people in Chicago during any comparatively short period of time, say one or two months, then no cash is sent. If, for a long time, however, the total payments to be made by Chicago in New York exceed by a considerable amount the total payments to be made by New York in Chicago, then and only then does actual shipment of money take place. A full study of this subject is taken up in courses on Political Economy. CHAPTER XXX PROPERTY INSURANCE 410. Insurance deals with problems arising from contracts in which one party agrees to indemnify another in case of damage from specified causes, to specified things or persons and in a specified time. 411. The Insurance Policy. A written or printed contract containing the provisions of an agreement to insure is called an insurance policy. 412. Parties to an Insurance Contract. The insurer is the party which agrees to indemnify another, and the party so indemnified is the insured. 413. Kinds of Policies. A valued or closed policy agrees to pay a specified sum in case a certain damage is sustained. An open policy provides insurance for an indeterminate amount, depending upon the quantity of goods insured at the time of damage. Thus a fire insurance policy covering goods stored in a warehouse insures whatever goods may be in the warehouse at the time of fire. At the end of the year the average amount of goods in the warehouse is computed and the premium fixed accordingly. 414. Premium. Rate. The amount paid by the insured to the insurer in consideration of the insurance is called premium. In the case of property insurance the premium is usually figured as a certain rate per cent of the amount insured. This is called the insurance rate. The rate varies greatly with the kind of property insured, and the length of time for which it is insured. 415. Kinds of Property Insurance. There is insurance against damage by fire, flood, and hail. There is marine insurance, river insurance, live stock insurance, and transit insurance which guarantees safe delivery. There is insurance against burglary and other theft, etc. This book treats particularly of fire insurance. 416. Long and Short Term Rates. The standard period for which fire insurance rates are quoted is one year. Three-year policies are usually issued for a premium equal to two and a half times the yearly premium and five-year policies for a premium equal to four times the yearly premium. For terms less than one year higher rates are charged. The following table shows the short term rates adopted by the Western Union of Underwriters. 1 Day 2% annual prem. 2 Days... 4% annual prem. 3 Days... 5% annual prem. 4 Days.. 6% annual prem. 5 Days... 7% annual prem. 6 Days... 8% annual prem. 7 Days... 9% annual prem. 8 Days... 9% annual prem. 9 Days...10% annual prem. 10 Days...10% annual prem. 11 Days...11% annual prem. 12 Days...12% annual prem. 13 Days...13% annual prem. 14 Days...13% annual prem. 15 Days...14% annual prem. 16 Days...14% annual prem. 17 Days...15% annual prem. 18 Days...16% annual prem. 19 Days...16% annual prem. 20 Days...17% annual prem. 25 Days...19% annual prem. 30 Days...20% annual prem. 35 Days...23% annual prem. 40 Days...26% annual prem. 45 Days...27% annual prem. 85% annual prem. 88% annual prem. 270 Days or 9 mo... 300 Days or 10 mo... 90% annual prem. 315 Days. 93% annual prem 330 Days or 11 mo... 95% annual prem. 360 Days or 12 mo... 100% annual prem. 417. Insurance Agent Broker. - Insurance companies are represented in various localities by agents who solicit insurance, write up policies, collect premiums, etc. These are called insurance agents and are regarded as the agents of the insurance company. The insurance broker does pretty much the same kind of work as the insurance agent, but he is legally the agent of the insured. 418. Ordinary Policy. - An ordinary policy stipulates the amount to be paid in case of loss. Under such a policy the company pays the full amount of the loss up to the amount of the policy. 419. The Average Clause. A single policy covering goods in different localities frequently contains a clause which stipulates that the company issuing the policy will pay only such proportion of the total loss as the amount insured bears to the total value of the property. Such a clause is called an average clause. 420. Three-fourths Value Clause or Coinsurance Clause. - In some insurance policies it is stipulated that the property shall be insured for at least three-fourths its actual value.. The purpose of the average clause is to guard against a small insurance policy on extensive property scattered in many different places. Clearly such a property is very much more liable to a small fire than to fires which will destroy the whole property. On buildings (brick or better) there is a reduction of 30% of premium if building is insured for 90% of value, a reduction of 25% if insured for 80% of value, and a reduction of 10% if insured for 70% of value. For contents of building these reductions are 20%, 15%, and 10% respectively. The purpose of the three-fourths value clause is to guard against a small insurance on valuable property with good fire protection. As in the case of scattered property, such property is more liable to a small fire than to one which will destroy the whole property. 421. Apportioning Loss. In case there are several insurance policies on the same property the loss is apportioned among them in proportion to the amount of the policies. Thus, a loss of $21,000, covered by three policies of $16,000, $24,000, and $30,000, will be apportioned among them in the amounts $4800, $7200, $9000. The loss is of the total insurance and each company pays % of the amount of its policy. 422. Cancelling Policies. Usually insurance policies contain a provision whereby they may be cancelled at the option either of the insurer or the insured. If the insurer requests the cancellation of the policy, he returns a part of the premium which bears the same ratio to the whole premium as the unexpired part of the term bears to the whole term. If the insured requests the cancellation, the premium charged for the expired part of the term is according to short term rates. |