XYZ Insurance Company has a liability profile that is predominantly comprised of 10-year annuity obligations totaling $500 million, with annual payments of $50 million due at the end of each year. The company seeks to use a duration-matching strategy to ensure that its assets sufficiently cover these liabilities while managing interest rate risk.
The current yield on long-term bonds in the market is 4%, and the company holds a portfolio of corporate bonds with an average duration of 7 years and an average yield of 5%. The insurance company is evaluating whether to maintain its current portfolio of corporate bonds or to invest in a new portfolio of government bonds with an average duration of 10 years and an average yield of 4%. The company’s investment committee is particularly concerned about the impact of interest rate changes on the value of its assets relative to its liabilities.
Which of the following statements best describes the impacts of duration matching for XYZ Insurance Company?