Fixed Income PF Managment Question - Pls Advise

liability, provided, structure

Hi there-working through some old questions and im just having a mental block on questions like this. Can someone provide better answer than what is provided below? I am sure its simple - but that doesnt mean i get it after months of reading this cr*p. Thx.

Q.
Company with pension fund has pension liability w/ duration of 10.1, and pension assets (FI portfolio) with duration of 6.1. Benchmark for FI portfolio is 5.5.

Given the term structure of rates and the mismatch between duration of asset and liability, the plan sponsor should be most concerned about:

A. flattening of the yield curve.
B. steepening of the yield curve.
C. large parallel shift up in the yield curve.

ANSWER
_________________________
A is correct. Given the mismatch in the liability and the benchmark they are running against, a flattening of the yield curve would cause the liability to increase faster than the asset

canadiananalyst

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发表于 2011-7-11 19:38 | 只看该作者

I think the point was that any DOWNWARD movement in YCurve is bad when your liabilities are more sensitive to rates than assets. Parallel vs flattening --> hard to tell. Its relative i think. Thanks all.

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