1. A pension plan is obligated to make disbursements of $1 million, $2 million, and $1...

1. A pension plan is obligated to make disbursements of $1 million, $2 million, and $1 million at the end of each of the next three years, respectively. Find the duration of the plan obligations if the interest rate is 10% annually. If the level of interest rates goes down by 50 basis points (one basis point is 0.01%), how much do you expect the pension plan obligation to go up (in percentage terms)?

Solutions

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Plan note:

Percentage increase in plan obligation value due to fall in interest rate is calculate based on duration. Actual amount change may be slight differ because duration calculation assumes linear relationship between interest rate and obligation value.

jeff jeffy answered 1 year ago

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