SIE Understanding Products and Their Risks Question 56: Answer and Explanation

Question: 56

An equity indexed contract holder has chosen a minimum guaranteed rate of 4%, along with a limited upside potential of 80% of the increase in the S&P Index, up to a maximum of 8%. If the S&P Index increases by 7%, what would the contract be credited with?

• A. 4%
• B. 5.60%
• C. 7%
• D. 8%

Correct Answer: B

Explanation:

B: Choice B, 5.6%, is correct because 80% of 7% equals 5.6%, which is greater than the guaranteed minimum of 4% and less than the maximum upside potential of 8%. Choice A, 4%, is incorrect because the calculated amount of 5.6% is greater than the guaranteed minimum of 4%. Choice C, 7%, the increase in the S&P Index, is incorrect because that is multiplied by 80% to obtain the calculated amount. Choice D, 8%, is incorrect because the calculated amount is 5.6%, which is less than the maximum.