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Question 10.EX.1: GUARANTEED INVESTMENT CONTRACTS A common investment product ...

GUARANTEED INVESTMENT CONTRACTS

A common investment product of a life insurance company is a guaranteed investment contract (GIC). With this investment, an insurance company guarantees a specified interest rate for a period of years. Suppose that the life insurance company agrees to pay 6% annually for a five-year GIC and the amount invested by the policyholder is $10 million.

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The amount of the liability (that is, the amount this life insurance company has agreed to pay the GIC policyholder) is the future value of $10 million when invested at 6% interest for five years:

PV = $10,000,000 , i = 6% , and N = 5,

so that the future value is

FV = $10,000,000 (1+0.06)^{5}   = $13,382,256

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