"A company issues a block of 5-year single premium investment policies to lives each aged 60 exact at commencement of a policy. It guarantees simple annual reversionary bonuses of 8% per annum of the single premium, with the possibility of a terminal bonus at maturity. The death benefit is 5 times the single premium. All premiums received under this policy are invested in an asset class where 5-year returns have a normal distribution with a mean of 50% and standard deviation of 25%. The company intends to declare terminal bonuses on maturity such that the proceeds of the policy are the greater of the guaranteed amount and 90% of the underlying asset value."
The ans. for this says that a loss will be made if the assets are worth less than 1.4 assuming that the single prem. is 1. If the total of the bonuses is 0.4, why is it that a loss would be made for assets less than 1.4 and not 0.4?
Thanks.
The ans. for this says that a loss will be made if the assets are worth less than 1.4 assuming that the single prem. is 1. If the total of the bonuses is 0.4, why is it that a loss would be made for assets less than 1.4 and not 0.4?
Thanks.