A life insurance firm wants to minimize 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

5-year zero coupon bonds would be the best choice as they offer a fixed return at maturity, eliminating interest rate risk. Additionally, the bonds' maturity date coincides with the life insurance firm's payment date, reducing the reinvestment risk. High yield utility stocks and 10-year coupon bonds both have interest rate risk, and money market investments provide little return over time and may be subject to market fluctuations.

A Life Insurance Firm Wants to Minimize Its Interest Rate