A Company That Sells Annuities Must Base the Annual Payout

question 155

Short Answer

A company that sells annuities must base the annual payout on the probability distribution of the length of life of the participants in the plan.Suppose the probability distribution of the lifetimes of the participants is approximately a normal distribution with a mean of 68 years and a standard deviation of 3.5 years.What proportion of the plan recipients die before they reach the standard retirement age of 65?

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Definitions:

Zero-Coupon Bond

A Zero-Coupon Bond is a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.

Yield To Maturity

The total return anticipated on a bond if it is held until the end of its lifetime.

Face Value

The nominal value printed on a financial instrument such as a bond or stock certificate; it is the amount paid at maturity or when the instrument is issued.

Current Price

The latest market price at which an asset or service is traded.