A life insurance firm wants to minimise its interest rate risk and it is planning on paying out $250 000 in five years. Which one of the following investments best matches its goal?

Question

Quizplus · Accepted Answer

The best choice for the life insurance firm would be 5-year zero coupon bonds as they have a fixed maturity date and a known payout amount, minimizing the interest rate risk. The other options do not provide the same level of certainty and involve higher levels of risk. High yield utility shares may have higher returns but are subject to market fluctuations and may not provide a guaranteed return. 10-year coupon bonds have a longer maturity date and may be subject to interest rate fluctuations over a longer period of time. Money market investments rolled over as needed have no fixed payout date and may also be subject to interest rate risk.

A Life Insurance Firm Wants to Minimise Its Interest Rate