If we keep the steam of payments a firm will need to make to retirees constant,...
If we keep the steam of payments a firm will need to make to retirees constant, will a firm's pension obligation be higher or lower with a lower interest rate?
Homework Answers
Answer:
Higher
As the steam of payments a firm will need to make to retirees constant, a lower interest rate will require a higher corpus (pension obligation).
When interest rate decreases, a higher amount of fund will be required to generate the constant stream of payment.
It is an annuity with PV being the pension obligation. In an annuity periodic payment remaining same, a lower discounting rate (interest rate) will result in higher present value.
As such firm's pension obligation will be higher.
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