Describes the insurance company profit

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Reference no: EM132021557

As of 12/31/03, an insurance company has a known obligation to pay $1,000,000 on 12/31/2007. 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 12/31/07. The maturity value of the bond equals the par value. Under the following reinvestment interest rate movement scenarios effective 1/1/2004, what best describes the insurance companys profit or (loss) as of 12/31/2007 after the liability is paid?

(a) Interest rates drop by 1/2%

(b) Interest rates increase by 1/2%

Reference no: EM132021557

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