A company owes 1,000 and 2,000 to be paid at the end of year one and...

  

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A company owes 1,000 and 2,000 to be paid at the end of year one and year four, respectively. The company creates an investment program to match the duration and the present value of the above obligation using an annual effective interest rate of 10%. The investment program produces asset cash flows of X and Y in three years. Calculate X, and determine whether the investment program satisfies the conditions for Redington immunization. A company owes 1,000 and 2,000 to be paid at the end of year one and year four, respectively. The company creates an investment program to match the duration and the present value of the above obligation using an annual effective interest rate of 10%. The investment program produces asset cash flows of X and Y in three years. Calculate X, and determine whether the investment program satisfies the conditions for Redington immunization.

Answer rating: 100% (QA)

To match the duration and present value of the obligations using the investment program we can use the concept of immunization which aims to ensure th... View the full answer