Question

My pension plan ₹10,000 a year for a 10-year period. the first payment will come exactly in 5 years. the pension fund wants to immunize its position.

a. what is the duration of its obligation to me? the current interest rate is 10% per year.

b. if the plan uses a combination of 5-year an 20-year zeros to construct the immunized position, how much money ought to be placed in

Answer 1

It works on method
Chit funds operate in different ways, and this may lead to many fraudulent tactics practised by private firms. The basic necessity of conducting a 'chitty' is a group of needy people called subscribers. The foreman — the company or person conducting the chitty — brings these people together and conducts the chitty. The foreman is also responsible for collecting the money from subscribers, presiding over the auctions, and keeping subscriber records. He is compensated by a fixed amount (generally 5% of the gross chitty amount) monthly for his efforts. Other than that, the foreman has no specific privileges, he is just a chitty subscriber. A simple formula depicts the pattern of the chitty:

Monthly premium and times; duration in months = gross amount

E.g., 1000 * 50 = 50,000/- Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the prize money every month.

The chitty starts on an announced date, and every subscriber comes together for the auction/lot. As per the Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured; that is 35,000 in the above example. When more than one person are willing to take this minimum sum, lots are conducted and the 'lucky subscriber' gets the prize money for the month. If there is no person willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding the lowest sum will get the bid amount.

In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example, if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 - 40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of 200. The same practice is repeated every month and every subscriber gets a chance of receiving some money.

Chit funds operate in different ways, and this may lead to many fraudulent tactics practised by private firms. The basic necessity of conducting a 'chitty' is a group of needy people called subscribers. The foreman — the company or person conducting the chitty — brings these people together and conducts the chitty. The foreman is also responsible for collecting the money from subscribers, presiding over the auctions, and keeping subscriber records. He is compensated by a fixed amount (generally 5% of the gross chitty amount) monthly for his efforts. Other than that, the foreman has no specific privileges, he is just a chitty subscriber. A simple formula depicts the pattern of the chitty:

Monthly premium and times; duration in months = gross amount

E.g., 1000 * 50 = 50,000/- Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the prize money every month.

The chitty starts on an announced date, and every subscriber comes together for the auction/lot. As per the Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured; that is 35,000 in the above example. When more than one person are willing to take this minimum sum, lots are conducted and the 'lucky subscriber' gets the prize money for the month. If there is no person willing to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding the lowest sum will get the bid amount.

In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example, if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 - 40,000) is divided by 50 (the total number of subscribers) and every one gets a discount of 200. The same practice is repeated every month and every subscriber gets a chance of receiving some money.