The term structure is Upward sloping meaning rate at Longer Maturity are higher than shorter maturity and duration of benchmark is less than duration of liability creating mismatch between two.
Can anyone cite on these questions answer?
the duration of the liability is longer than the duration of the benchmark .
If rates at the far end reduce , while the near end stays same or reduces less , the present value of the liability increases more than the present value of the portfolio , so you have a asset-liability imbalance working against the pension fund.
thanks
That doesn’t make sense. If duration of liability > duration of portfolio, the steepening of yield curve would be the concern. Answer #A can only be correct if the curve is backwardated.
Any other insights?
Never mind. I got it. There’s another post on this site that does a good job explaining this question.