SOA Exam FM Sample Question 221
Study guide: Exam FM-2
A life insurance company sells a two-year immediate annuity with annual payments of 1000 for a price of 1817.
The investment actuary invests the 1817 in two zero-coupon bonds.
- The first bond matures in one year and earns an annual effective interest rate of 6%. The second bond matures in two years and earns an annual effective interest rate of 7%.
- 999.35 is invested in the first bond and 817.65 is invested in the second bond.
- The two bonds are held to maturity.
As long as the effective annual one-year reinvestment rate is at least X% one year from now, the principal and interest earned will be sufficient to make the two annuity payments.
Calculate X.
- A) 6.0
- B) 6.6
- C) 7.0
- D) 7.3
- E) 7.7
Answer this question and see the worked solution