Hi Pls explain i) how will the cost of guarantee increase in the interest rate down scenario? Bit Confused. I do understand that the price of bonds will go up as interest rate goes down. iii) In part 3,why doesn't the answer mention about distribution of estate factors as the question states details about the estate being higher than the preferred range in the ques just before ques in part iii)
(i) The guarantee in question is a guaranteed annuity option (= option to convert the cash benefit into an annuity at a minimum guaranteed annuity rate). This will come into the money when interest rates are low (since market annuity rates will be relatively unattractive under those conditions). (iii) Apologies but I am not sure that I understand what you are concerned about here. The question is asking about the factors that would be considered when distributing part of the estate (the 'surplus' referred to) in order to bring it down to a more appropriate level (bear in mind that we are not talking about distributing the whole estate here, just part of it). So that is what the solution covers: factors to consider when distributing surplus = part of the estate.
