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Seldom-Pay is a large global insurance company operating along various lines of insurance products, ranging from ordinary term life-insurance, variable annuities, and reinsurance. Recently, Seldom-Pay has expanded its offerings into the realm of employer-sponsored defined contribution (DC) retirement plans, such as 401(k) and 403(b) plans.

In an effort to drum up business for its new offerings, the firm has announced an unusually generous product that allows retirement plan participants to invest a defined sum into a guaranteed insurance contract (GIC). This particular GIC would allow any participant to invest a sum equal to $7,257.96 today in return for a guaranteed payment of $15,470.99 in 7 years time.

As the payoff to plan participants in guaranteed by Seldom-Pay, and any failure to satisfy this guarantee could throw Seldom-Pays entire business into jeopardy, the investment analysis team needs to be absolutely certain that the obligation can be fulfilled at the scheduled horizon date. The Chief Investment Officer of the DC division, David Swanson, has identified two possible funding plans for the GIC. Under either funding plan, Seldom-Pay would open a subscription period for the GIC in which any and all plan participants could indicate their intention of taking advantage of the GIC offer. At the conclusion of the subscription period, Seldom-Pay will allocate the proceeds to its chosen funding plan, and no further deposits to the GIC will be permitted.

As a junior analyst, you have been asked to evaluate these funding plans and to make a recommendation.

Funding option 1: Swanson has identified a $10,000 par value corporate bond that matures in 12 years that carries an annual coupon rate of 7% (3.50% paid semi-annually). The bond currently sells to yield (YTM) 11.21%.

Funding option 2: Swanson has identified another $10,000 par value corporate bond which matures in 10 years and carries an annual coupon rate of 6.50% (3.25% paid semi-annually). This bond currently sells to yield 11.11%.

Swanson intends to fund the GIC obligation with one or the other of these bonds. Since both bonds mature after the scheduled maturity date of the GIC, Seldom-Pay must be concerned with the resale value of the bond when the GIC comes due. Additionally, the insurer needs to evaluate the accumulated value of the periodic coupon payments (including the interest earned thereon) at the 7-year horizon date for the GIC.

Swanson has no particularly strong views on the future direction or magnitude of interest rate changes, but he believes that, due to recent changes in the composition of the Federal Reserve, a change in the level of interest rates is a near certainty. On the basis of this view, Swanson wants to investigate the likelihood of being able to fully satisfy the GIC obligation at the scheduled due date.

For each of Swansons two proposed funding choices, complete the following table indicating the total proceeds from the funding assets at the terminal horizon date. For each new YTM, assume that the change in yields occurs immediately following the purchase of the bond and that yields then remain at this new level for the 7-year investment horizon. Further, assume that all periodic coupons will be reinvested at this new YTM. Both bonds have just paid a coupon and, thus, the next coupon payment will come one semiannual period from today.

Funding Option 1
New YTM	6%	8%	10%	12%	14%	16%
Accumulated Coupons
Sale of the Bond
Total Proceeds
GIC Fully Funded (Yes/No)
Funding Option 2
New YTM	6%	8%	10%	12%	14%	16%
Accumulated Coupons
Sale of the Bond
Total Proceeds
GIC Fully Funded (Yes/No)

Determine, for each funding option, whether the conditions for single liability immunization have been satisfied.

1. Is the present value of the funding asset equal to the present value of the liability?
   1. Present value of funding asset 1 =
   2. Present value of funding asset 2 =
   3. Present value of liability =

2. Is the duration of the funding asset equal to the duration of the liability? (Specify duration in terms of semi-annual periods.)
   1. Duration of funding asset 1 =
   2. Duration of funding asset 2 =
   3. Duration of liability =

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