View the step-by-step solution to:

Question

Can you explain this?

http://www.ambest.com/home/default.aspx  

alt="7.png" />8.png9.png

7.png

(45 pta) 3. Assume today's U.S. Treasury Yield Curve is given below. You can use this to estimate
the average rate of inflation for the next thirty years as the difference between the nominal rate on a
30-Year Treasury bond and the Inflation Indexed Treasury bond- (often called Treasury Inflation
Protected bonds or TIPs-Real Rate). The shape of the Yield Curve also tells us something about future
interest rates.
U.S. Treasury Yield Curve (Nominal Rates)
Date
2 00
309 609 185 2 86 386 5 85 7 85 10 4 20 4 30 45
08/19/19
2.01
1.99
1.93
1.92 1.88 1.74 1.68 1.66 1.73 1.79 2.04 2.22
U.S Treasury Yield Curve (Real Rates-TIPS)
DATE
5 YR
7 YR
10 YR
20 YR
30 YR
08/19/19
0.25
0.21
0.18
0.38
0.57
Your 25 year old client wants to retire when he is 70 years old, and have a retirement income
equivalent to $8,000 per month in today's (inflation adjusted) dollars. To estimate the market
expectations for average annual inflation for the next 45 years, use the difference between the nominal
rate and real rate on TIPs for the 30-year Treasury rates given above. Because of inflation, he will
need substantially higher retirement monthly income to maintain the same purchasing power. He plans
to purchase a guaranteed lifetime annuity from a AAA rated insurance company' one month before he
retires (539 months from now). The retirement annuity will begin in exactly 45 years (540 months).
At the time the retirement annuity is purchased, the insurance company will add a 5.00 percent
premium to the pure premium cost of the purchase price of the annuity. The pure premium is the
actuarial cost of his anticipated lifetime annuity. He has savings of $60,000 today that will be invested
at an annual return of 6.00%. Given a rate of return of 6.00% for the foreseeable future, how much
does he need to save each month (total of $39 payments) until the month before he retires? He will
make the first payment next month and the last payment one month before he retires. For life
expectancy after retirement, use the Cohort Life Tables for Social Security Area by Sex table below:
Cohort Life Tables for Social Security by Sex
Male
Female
Probability
# of 100,000
Life
Probability
# of 100,000
Life
Age Death
Living
Expectancy
Age Death
Living
Expectancy
40
0.00170
96,759
42.94
40
0.00108
98,088
46.22
41
0.00183
96,595
42.01
41
0.00116
97,982
45.27
42
0.00196
96,418
41.09
42
0.00123
97,869
44.33
43
0.00209
96,229
40.17
43
0.00129
97,749
43.38
44
0.00223
96,028
39.25
44
0.00135
97,622
42.43
45
0.00238
95.814
38.33
45
0.00142
97,490
41.49
46
0.00254
95.586
37.43
46
0.00150
97,352
40.55
See http://www.ambest com/home/default.aspx AM Best is the only global credit rating agency with a unique focus on the insurance
industry-

8.png

9.png

Expected Inflation =
Expected Remaining Life in Months at Retirement =
Needed per month retirement income.
FV 45 Years = $8,000 (1
45 = $8,000(
) = $
Total amount Needed in retirement account one month (month 539) before
retirement.
PXAugust 539 = $
1 -( +
$
Premium and price to Insurance Company
Price = $
(1.050) =
$
Value of Current Savings in 539 months (assuming monthly compounding.
FV:39 months = $60,000 (1.
)$39 = $60,000 (
= S
Total New Saving needed by month 539 =
Saving Each month for next 539 Months.
FVA _ _ (+ ) - 1 = $
A.
Then,
A = $
per month

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes