Good Fortune Insurance Company is selling annuities that promise to pay 8% inter

Question

Good Fortune Insurance Company is selling annuities that promise to pay 8% interest starting 5 years in the future. 10-year risk-free assets( US Treasury bonds) are selling at 1.75%. which of the following is most correct?

A GFIC should be able to invest the current money in risk-free investments and have no problem profiting from the annuity sale

B GFIC is guaranteed to make a profit on this project

C The payouts are much higher than the risk-free rate and could be a risk to GFIC

D GFIC should raise the payout to 12% to attract new customers

Explanation / Answer

The Return 10 year risk free assets = 1.75%

GFIC, selling annuities promise to pay 8% Interest starting 5 years in the future.

Therefore, the Payout are much higher than the risk free rate and could be a risk to GFIC.

Therefore, the Answer is " C ".

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