A company faces a stream of obligations over the next 4 years as shown below, where the
Question:
A company faces a stream of obligations over the next 4 years as shown below, where the numbers denote thousands of dollars.
Year | 1 | 2 | 3 | 4 | |||
CF ('000) | 200 | 0 | 500 | 300 |
The spot rate curve is given below:
Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
Spot Rate (%) | 6.68 | 7.27 | 7.81 | 8.31 | 8.75 | 9.16 | 9.52 | 9.85 | 10.15 | 10.42 |
The company decides to invest in two bonds (each with face value $1,000) described as follows:
Bond 1 is a 4-year 8% coupon bond, and
Bond 2 is a 3-year zero-coupon bond.
(a) Calculate the prices of the two bonds and the obligation. (Keep 2 decimal places, e.g xx.12)
Bond 1: _____________ Bond 2: ______________ Obligation: __________
(b) Calculate the quasi-modified durations for the two bonds and the obligation. (Keep 2 decimal places, e.g xx.12)
Bond 1: ____________ Bond 2: ______________ Obligation: _____________
(c) Find a portfolio P1x1 + P2x2, where x1 and x2 denote the number of units of bonds 1 and 2, that has the same present value as the obligation stream and is immunized against a parallel shift in the spot rate curve. (Keep 2 decimal places, e.g xx.12)
x1: _____________ x2: __________________
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston