Question

Bob's indexed annuity uses a point-to-point strategy and has a 75 percent participation rate but no cap rate. What interest rate would be used to credit interest on funds in his annuity if the index closing level was 1000 at the beginning of the index term period and 1200 at the end of the period?

Answer 1

Answer: To calculate the interest rate that would be used to credit interest on funds in Bob's indexed annuity, we can use the point-to-point strategy with a 75 percent participation rate.

The formula to calculate the interest rate is as follows:

Interest Rate = (Ending Index Level / Starting Index Level - 1) * Participation Rate

Using the given information:

Starting Index Level = 1000

Ending Index Level = 1200

Participation Rate = 75% or 0.75

Plugging these values into the formula:

Interest Rate = (1200 / 1000 - 1) * 0.75

= (1.2 - 1) * 0.75

= 0.2 * 0.75

= 0.15 or 15%

Therefore, the interest rate that would be used to credit interest on funds in Bob's indexed annuity, given the specified parameters, would be 15%.