Question: My pension plan will pay me $10,000 once a year for a 10-year period. The first payment will come in exactly 5 years. The pension

My pension plan will pay me $10,000 once a year for a 10-year period. The first payment will come in exactly 5 years. The pension fund wants to immunize its position.

a. What is the duration of its obligation to me? The current interest rate is 10% per year.

b. If the plan uses 5-year and 20-year zero-coupon bonds to construct the immunized position, how much money ought to be placed in each bond? What will be the face value of the holdings in each zero?

Step by Step Solution

★★★★★

3.27 Rating (168 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a The duration of the annuity if it were to start in 1 year would be 1 2 3 4 5 Time until Payment ye... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

225-B-A-I (2792).docx

120 KBs Word File

Students Have Also Explored These Related Accounting Questions!

What is a consol bond? What is the duration of a consol bond that sells at a yield to maturity of 8 percent? 10 percent? 12 percent? Would a consol trading at a yield to maturity of 10 percent have a...

What is the duration of a common stock whose dividends are expected to grow at a constant rate in perpetuity?

What is the duration of a five-year, $ 1,000 Treasury bond with a 10 percent semiannual coupon selling at par? Selling with a yield to maturity of 12 percent? 14 percent? What can you conclude about...

QUESTION ONE a) Kethi Kittony is a portfolio manager for the Kiganda Fund (Kiganda), a core large-cap equity fund. The market proxy and benchmark for performance measurement purposes is the NSE20....

c) My pension plan will pay me KES 10,000 once a year for a 10-year period. The first payment will come in exactly 5 years. The pension fund wants to immunize its position. i. What is the duration of...

4. Answer the following questions: (24 points) a) The following table provides a bank's balance sheet as of today. The fixed-rate mortgage has a modified duration of 5 years. The yield curve is flat...

My pension plan will pay me $13,000 once a year for a 10 -year period. The first payment will come in exactly five years. The pension fund wants to immunize its position. a. What is the duration of...

Determine the mole fraction of sodium that ionizes according to the reaction Na Na+ + e- at 2300 K and 0.5 atm (use K = 0.688 for this reaction).

In Problems 55 - 62, f(x) is continuous on (-,). Use the given information to sketch the graph of f. 56. 58. 60. f(-2) = -l,f(0) = 0,f(2) = 1; f(-2) = 0,f'(2) =0; f(x) > 0 on (-, -2), (-2,2), and (2,...

2. Since the good, according to Plato, is that which furthers a persons real interests, it follows that in any given case when the good is known, men will seek it. Each of the following passages...

At the beginning of the current year, Christie contributes three parcels of property to the ABC Partnership in exchange for a 30% interest in the partnership. The properties were as follows: FMV...

Thornby Inc. has completed its fiscal year on December 31. The auditor, Kim Holmes, has approached the CFO, Brad Potter, regarding the year-end receivables and inventory levels of Thornby Inc. The...

Water is pumped from a supply reservoir to a ductile-iron water-transmission line, as shown in Figure 2.26. The high point of the transmission line is at point A, 1 km downstream of the supply...

Small Business Management 2520-51 Case Study #1 The Business Plan: Chapter Closing Case Memory by Music Blake Harrison was a good student in high school, but he struggled to memorize facts for tests....

The following is a summary of transactions for January 20xx, gathered by the Sample Cafe bookkeeper. Sample Cafe Transactions Item Notes 8,700 medium cups of coffee sold at $3.00 each Includes 600...

11. How might a college or university segment its customers? What specific needs might each of these customer groups have?

You are considering an investment in a mutual fund with a 4% load and an expense ratio of .5%. You can invest instead in a bank CD paying 6% interest. a. If you plan to invest for 2 years, what...

The Investments Fund sells Class A shares with a front-end load of 6% and Class C shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full...

Loaded-Up Fund charges a 12b-1 fee of 1.0% and maintains an expense ratio of .75%. Economy Fund charges a front-end load of 2% but has no 12b-1 fee and has an expense ratio of .25%. Assume the rate...

How does fragmentation affect the priority mechanism? anhelo traders to queue-jump to priority I can help traders to queue jump both time and price priority traders to pri privity Ofrontation does...

I NEED ANSWER "B" Howell Petroleum, Incorporated, is trying to evaluate a generation project with the following cash flows: a-1.What is the NPV for the project if the company requires a return of 12...

Winnebagel Corp. currently sells 29,900 motor homes per year at $82,500 each and 8,900 luxury motor coaches per year at $124,500 each. The company wants to introduce a new portable camper to fill out...