Consider a hypothetical insurance company that has been selling GICsfor many years. A year from today, you expect the aggregate payment for the maturing GICs to be £20 million. Thereafter, you project payments for maturing GICs to grow forever at an annual rate of 1%. The term structure is flat at 9%, and the current assets of the company consist of £300 million in cash. Rates are with annual compounding. 

(a) What is the present value of the company's GIC liabilities? What is the company's net worth? 

(b) Suppose the company keeps its assets in cash. Explain why this is a dangerous choice. To provide an example, consider a parallel shift in the term structure to 5% (the term structure remains flat).

Answer rating: 100% (QA)

Aggregate payments mean all payments securities or others acquired by the agency or its associates w... View the full answer