Question
As of 12/31/03, an insurance company has a known obligation to pay 1,100,000 on 12/31/2007. To fund this liability, the company immediately purchases 4-year 5%
As of 12/31/03, an insurance company has a known obligation to pay 1,100,000 on 12/31/2007. To fund this liability, the company immediately purchases 4-year 5% annual coupon bonds totaling 904,973 of par value. The maturity value of the bond equals the par value. The company anticipates reinvestment interest rates to remain constant at 5% through 12/31/07.
Under the following reinvestment interest rate movement scenarios effective 1/1/2004, what best describes the insurance company's profit or (loss) as of 12/31/2007 after the liability is paid?
The answers are in the form Interest Rates Drop by 1/2 %, Interest Rates Increase by 1/2 %.
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