Your firm has sold GIC's (guaranteed investment contracts) which promise to pay $100,000 per year for 3
Question:
Your firm has sold GIC's (guaranteed investment contracts) which promise to pay $100,000 per year for 3 years, with the first payment due 4 years from today. Assume the yield curve is flat at an 8% annual rate. You are going to use 5 year maturity and 10 year maturity bonds to set up an immunized position. The 5 year maturity bonds have a coupon rate of 10% (paid annually), a Macaulay duration of 4.204 years, and a $1,000 par value. The 10 year maturity bonds have a coupon rate of 8%(paid annually), a Macaulay duration of 7.247 and a $1000 par value. How much (in market value) needs to be held in the 10-year maturity bonds to both fully fund and immunize your obligation?
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty