Consider a pension plan that pays beneficiaries in the following
manner: at the end of the retirement year of a beneficiary the
value of all benefits are transferred to his or her personal
account. This means that at the end of every year the pension plan
makes lump-sum payments of pension benefits to its beneficiaries.
The pension plan’s actuarial team concluded that the pension’s
obligation stream could not be estimated beyond an 80-year horizon.
They further estimate that the plan will have to make annual
pension payments of $10 million per year throughout this 80-year
horizon. The first payment will take place in exactly one year.
Assume the current yield curve is flat at 6%. Consider a pension
plan that pays beneficiaries in the following manner: at the end of
the retirement year of a beneficiary the value of all benefits are
transferred to his or her personal account. This means that at the
end of every year the pension plan makes lump-sum payments of
pension benefits to its beneficiaries. The pension plan’s actuarial
team concluded that the pension’s obligation stream could not be
estimated beyond an 80-year horizon. They further estimate that the
plan will have to make annual pension payments of $10 million per
year throughout this 80-year horizon. The first payment will take
place in exactly one year. Assume the current yield curve is flat
at 6%.
Answer:
Duration of plans expected obligation stream is 80 year
Explanation:
Duration of plans expected obligation stream is 80 year because the pension plan’s actuarial team concluded that the pension’s obligation stream could not be estimated beyond an 80-year horizon. They further estimate that the plan will have to make annual pension payments of $10 million per year throughout this 80-year horizon. Therefore the duration of plans expected obligation stream is 80 year.
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