a Canadian pension fund manager seeks to measure the sensitivity of her pension lia- bilities to market interest rate changes. The manager determines the present value of the Liabilities under three interest rate scenarios: a base rate of 7%, a 100 basis point increase In rates up to 8%, and a 100 basis point drop in rates down to 6%. The results of the Manager's analysis are presented below: $\begin{array} { l c }
\hline\text { Interest Rate Assumption } & \text { Present Value of Liabilities } \
\hline 6 \% & \text { CAD510.1 million } \
7 \% & \text { CAD455.4 million } \
8 \% & \text { CAD373.6 million } \
\hline
\end{array}$ The effective duration of the pension fund's liabilities is closest to:
A) 1.49.
B) 14.99.
C) 29.97.

Question

a Canadian pension fund manager seeks to measure the sensitivity of her pension lia- bilities to market interest rate changes. The manager determines the present value of the Liabilities under three interest rate scenarios: a base rate of 7%, a 100 basis point increase In rates up to 8%, and a 100 basis point drop in rates down to 6%. The results of the Manager's analysis are presented below: $\begin{array} { l c } 
\hline\text { Interest Rate Assumption } & \text { Present Value of Liabilities } \
\hline 6 \% & \text { CAD510.1 million } \
7 \% & \text { CAD455.4 million } \
8 \% & \text { CAD373.6 million } \
\hline
\end{array}$ The effective duration of the pension fund's liabilities is closest to:
A) 1.49.
B) 14.99.
C) 29.97.

Quizplus · Accepted Answer

Effective duration can be calculated using the formula: $\frac{V^{-} - V^{+}}{2 \times V^{0} \times \Delta y}$, where $V^{-}$ is the value if rates decrease, $V^{+}$ is the value if rates increase, $V^{0}$ is the value at the current rate, and $\Delta y$ is the change in yield (in decimal form). Plugging in the given values: $\frac{510.1 - 373.6}{2 \times 455.4 \times 0.01}$ = 14.99.

A Canadian Pension Fund Manager Seeks to Measure the Sensitivity