Consider a pension plan with the following characteristics: Assets: Market Value = $1,000,000,000 Modified Duration = 7 years Liabilities: Market Value = $1,025,000,000 Modified Duration = 8 years
(a) Currently this plan is underfunded by $25,000,000. If rates rise, will the plan become more or less over funded? Show the calculations which led to this conclusion. You can ignore convexity impacts.
(b) Aproximately what change in interest rates would cause the surplus to shrink to zero? You can ignore convexity effects for this question.