Question
Hometown insurance sells 10year annuities to retirees who are looking for stable sources of investment income. hometown invests the annuity funds it receives in an
Hometown insurance sells 10year annuities to retirees who are looking for stable sources of investment income. hometown invests the annuity funds it receives in an equity index fund with annual returns that are normally distributed with a mean of 9% and standard deviation of 3%. it guarantees investors a minimum annual return of 6% and a maximum return (or rate cap) of 8.5%. this limits both the retirees' downside risk and upside return potential. of course, hometown makes its money on these contracts when the actual return exceeds the rate cap. suppose a retiree in vests $50,000 in such an annuity contract. assume investment earnings are credited at the end of the year and are reinvested.
Questions
a. build a spreadsheet model for this problem that computes the profit hometown would make on the contract.
b. how much money can hometown expect to make on average on the contract?
c. what is the probability that hometown would lose money on the contract?
d. suppose that hometown wants to identify the minimum guaranteed annual rate of return that provides a 2% chance of the company losing money on the con tract. what should the minimum guaranteed annual rate of return be?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started