A Canadian Pension Fund Manager Seeks to Measure the Sensitivity

question 26

Multiple Choice

a Canadian pension fund manager seeks to measure the sensitivity of her pension lia- bilities to market interest rate changes. The manager determines the present value of the Liabilities under three interest rate scenarios: a base rate of 7%, a 100 basis point increase In rates up to 8%, and a 100 basis point drop in rates down to 6%. The results of the Manager's analysis are presented below: $\begin{array} { l c } \hline\text { Interest Rate Assumption } & \text { Present Value of Liabilities } \\\hline 6 \% & \text { CAD510.1 million } \\7 \% & \text { CAD455.4 million } \\8 \% & \text { CAD373.6 million } \\\hline\end{array}$ The effective duration of the pension fund's liabilities is closest to:

• A) 1.49.
• B) 14.99.
• C) 29.97.

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Definitions:

Income Statement

A financial statement that reports a company's earnings, expenses, and net income over a specific period.

Ending Inventory

Merchandise value ready to be sold at the close of an accounting cycle.

Retained Earnings

The portion of net earnings not distributed as dividends, but retained by the company to be reinvested in its core business or to pay debt.

Accounting Principle

Guidelines and rules that govern the accounting practices and procedures.