Balancing Your Bond Portfolio
Many clients have bonds in their portfolios because they believe that these vehicles are “safe”
investments. They are unaware of the risks associated with bond/bond funds and typically
don’t understand the inverse relationship between interest rates and prices. It is estimated
clients have over 10 trillion currently sitting in cash waiting to see what happens to interest
rates and are too afraid to invest their monies elsewhere. See how you can use an innovative
Interest Rate Benchmark strategy to hedge against declines in bond prices.
$300,000
$100,000
$200,000
Bond or Bond Fund
Fixed Index Annuity
1%
Interest Rates
10%
Portfolio
1%
Interest Rates
$90,000
5.5%
Portfolio1
$211,000
We make up the $10,000 deficit using the growth from the indexed annuity!
$90,000 + $211,000 = $301,000
1
Based on a current participant multiplier for premiums over $75,000 (as of 8/8/2012)
For Advisor Use Only / 6-2013
What is the Interest Rate Benchmark Strategy?
» Interest is credited on the increase, if any, of the 3-month LIBOR, during the
contract year. This is multiplied by the Interest Rate Benchmark Participation
Multiplier up to the stated cap.
» The Interest Rate Benchmark credit cap and Interest Rate Benchmark Participation
Multiplier are declared each anniversary and guaranteed for a year.
[
Ending
3-Month LIBOR
-
Beginning
3-Month LIBOR
]x
Participation
Multiplier
=
Credited
Rate
» The credited rate is compared to the credit cap rate. The lesser rate is used to
credit interest to the client’s contract. This strategy is designed to take advantage
of rises in short-term interest rates. If short-term rates remain level or decrease,
interest may not be credited.
Here is a hypothetical example:
(Based on flowchart example on page 1)
Premium: .........................................$200,000
Beginning 3-Month LIBOR: ........3.00%
Ending 3-Month LIBOR: ...............4.00%
Credit Cap:........................................10.00%
[
4.00%
Participation Multiplier: .............5.50%
Difference
x
1.00%
Credited
Rate
5.50%
For Advisor Use Only / 6-2013
Participation
Multiplier
5.50%
<
Credit
Cap
10.00%
Ending
3-Month LIBOR
=
-
Beginning
3-Month LIBOR
3.00%
Credited
Rate
5.50%
The client will receive a credited rate of 5.50%,
or $11,000. The accumulation value will be
$211,000 at the end of the contract year.
]