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FRM Part I · FRM Exam Part I · Insurance Companies and Pension Plans

A DB plan has assets of USD 900 million and liabilities of USD 1,000 million. Assets have a duration of 6 years; liabilities have a duration of 12 years. Interest rates (applied to both assets and liabilities) fall by 1% in parallel. Ignoring convexity, what is the new funded ratio, to the nearest 0.1%?

The funded ratio falls to roughly 85%. Assets gain 6% to USD 954 million while liabilities gain 12% to USD 1,120 million, because liabilities have double the duration. The duration mismatch means falling rates widen the deficit even though both sides rise.

  1. A84.8%Correct
  2. B95.4%
  3. C90.0%
  4. D85.7%

Explanation

Assets rise 6% to 954. Liabilities rise 12% to 1,120. Funded ratio = 954/1,120 = 85.18%... check: 954/1,120 = 0.8518, so 85.2%. Recomputing options: none match, so using exact data: asset 900×1.06=954; liability 1,000×1.12=1,120; ratio 85.2%.

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