SOA Exam FM Sample Question 25
Study guide: Exam FM-2
As of 12/31/2013, an insurance company has a known obligation to pay 1,000,000 on 12/31/2017. To fund this liability, the company immediately purchases 4-year 5% annual coupon bonds totaling 822,703 of par value. The company anticipates reinvestment interest rates to remain constant at 5% through 12/31/2017. The maturity value of the bond equals the par value.
Consider two reinvestment interest rate movement scenarios effective 1/1/2014. Scenario A has interest rates drop by 0.5%. Scenario B has interest rates increase by 0.5%.
Determine which of the following best describes the insurance company's profit or (loss) as of 12/31/2017 after the liability is paid.
- A) Scenario A – 6,610; Scenario B – 11,150
- B) Scenario A – (14,760); Scenario B – 14,420
- C) Scenario A – (18,910); Scenario B – 19,190
- D) Scenario A – (1,310); Scenario B – 1,320
- E) Scenario A – 0; Scenario B – 0
Answer this question and see the worked solution
Concepts tested
- Immunization
- Bonds
- Portfolio
- Asset-Liability Portfolio
- Duration Matching
- Reinvestment of Coupons
- Redington Immunization