CIA.Duration

Question 1

What does duration measure?

Answer 1

1) average maturity of fixed future cash flows
2) sensitivity of PV cash flows to interest rate changes

Question 2

What is the formula for CapReq(IntRt)

Answer 2

CapReq(IntRt) = (chg.A - chg.L),
where chg(A or L) = (Fair Value) x chg(IntRt) x (modified duration)]

Question 3

Contrast effective duration and modified duration.

Answer 3

Effective duration accounts for situations where the cash flows may change as a result of changes in interest rates. Modified duration does not.

Question 4

Macaulay Duration

Answer 4

Macaulay duration = a weighted average of time where the weights are the cash flows.

Question 5

Modified Duration

Answer 5

modified duration = (Macaulay duration) / (1 + yield rate)
assuming that expected cash flows do not change when interest rates change

Question 6

Effective Duration formula

Answer 6

(V- - V+) / (2 * Δy * V0)

Question 7

Modified Duration formula

Answer 7

( ƩtxPVCFt duration / Market Value) * (1/(1+Yield))

Question 8

describe the concept behind ‘modified duration’

Answer 8

modified duration is the approximate % change in PV(cash flows) from a 100 bps change in interest rate ASSUMING no change in cash flows

Question 9

what is the formula relating Macaulay and modified duration

Answer 9

modified duration = (Macaulay duration) / (1 + discount rate)

Question 10

Define the interest rate risk

Answer 10

risk associated with a shift in the market yield curve and its resulting impact on the values of assets and liabilities

Question 11

Discounting requirement under GMA & PAA

Answer 11

Under the GMA, insurance contract assets and liabilities are discounted.

PAA, LIC (and AIC) are generally discounted except when the claims are expected to be paid out within a year; LRC (and ARC) are generally not discounted except when a group of contracts has a significant financing component