An insurance company has issued $700,000,000 in short-term notes with a 1-year maturity to finance the...

 

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An insurance company has issued $700,000,000 in short-term notes with a 1-year maturity to finance the purchase of $700,000,000 short-term investments with a 3-year maturity. The insurance company must pay 5.5% annual interest on the notes but earns 8.2% annual interest on the investments. a. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 1. (5 points) b. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 2 if the bank must issue new notes with 7.3% annual interest. (5 points) c. What type of interest rate risk is the insurance company facing due to the different maturities on its assets and liabilities? Why is this a concern to the insurance company? (3 points) An insurance company has issued $700,000,000 in short-term notes with a 1-year maturity to finance the purchase of $700,000,000 short-term investments with a 3-year maturity. The insurance company must pay 5.5% annual interest on the notes but earns 8.2% annual interest on the investments. a. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 1. (5 points) b. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 2 if the bank must issue new notes with 7.3% annual interest. (5 points) c. What type of interest rate risk is the insurance company facing due to the different maturities on its assets and liabilities? Why is this a concern to the insurance company? (3 points)

Answer rating: 100% (QA)

A 13 Compulation of and insurance co Profit Spoeed Dollar Jalue of profit at end of fees Compan... View the full answer