CAS Exam 9 Spring 2015, Question 11
Study guide: Exam 9
Insurer ABC has a long history of projecting interest rates into the future and acting on those predictions in order to increase its surplus. Insurer ABC has forecasted a decrease in interest rates for the next 10 years.
Insurer XYZ does not project interest rates into the future and relies on underwriting results in order to increase its surplus.
Both insurers have a reserve of $5 million which will be paid in a single payment in 5 years.
In order to fund this liability, the following assets are available:
| Bond | Maturity (years) | Par Value (millions) | Annual Coupon | Duration | Price (millions) |
|---|---|---|---|---|---|
| A | 5 | 5.0 | 0% | 5.00 | 4.53 |
| B | 5 | 4.0 | 4.8% | Not Given | Not Given |
| C | 7 | 4.5 | 2.1% | 6.58 | 4.53 |
The current interest rate is 2%.
Part a (0.5 points)
Calculate the duration and price for bond B.
Part b (1 point)
Determine which asset Insurer ABC would purchase and fully explain the reasoning behind their decision.
Part c (0.75 points)
Determine which asset Insurer XYZ would purchase and fully explain the reasoning behind their decision.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution