Hi can anyone explain me the impact when the portfolio duration is greater than liability duration and it is forecasted that the interest rates will increase.
Thank you
portfolio value will drop down more than liability since portfolio is more affected by change in interest rates (high duraction). So if we have a surplus and duration of assets > duration of liabilities, value of assets will drop more than liabilities would.
Bilal, thank you
How would the reinvestment return on the asset and interest cost on the liability impact the surplus?
Kindly help.
You will reinvest coupons at higher rate => reinvestment risk decrease
If interest rates are rising, and one of your investments’ coupons were halted and principal was repaid, you’ll invest your amount at a higher rate thus increasing your surplus. however the opposite would be the case especially in cash flow risk, where you will get lower prepayments thus decreasing your liquidity and affecting your surplus.