An insurance company must make payments to a customer of 10$ million in one year and 5$ million in five years. The yield curve is flat at 10%.

a. If it wants to fully find and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase?

b. What amount should be invested in the zero-coupon bonds? What will be the maturity value of the zero-coupon bonds?

c. What will be the net position of the insurance, that is, the difference between the value of the zero-coupon bonds and that of the obligation if yields stay at 10%?

d. What will happen to the net position if the yield falls to 8%? What if the yield rises to 12%?

Answer rating: 100% (QA)

To fully fund and immunize the obligation to the customer the insurance company needs to purchase a ... View the full answer