Answer: Improvement in funded status because present value of liabilities decreases more than assets decrease

**Correct answer: A** When interest rates rise, the present value of future liabilities falls because those cash flows are discounted at a higher rate. In a defined benefit pension fund, liabilities are typically longer duration than assets, so they are usually **more sensitive** to interest-rate increases than the asset portfolio. In this scenario: - **Equities are approximately flat**: no material change in the equity portion of assets. - **Bonds decrease in value**: higher rates reduce bond prices. - **Liabilities decrease in present value**: the discount rate used to value pension obligations rises. Because the liabilities generally fall more than the assets do, the **funded status improves**. ### Why the other choices are wrong - **B**: assets do not increase when rates rise; bond values fall. - **C**: liabilities do not increase when rates rise. - **D**: liabilities do decrease, but it is not typically the case that assets decrease more than liabilities in this setup; the opposite is more likely. So the most likely outcome is an **improvement in funded status because present value of liabilities decreases more than assets decrease**.

Author: Manit Arora