Assume that your employer has a $1.5 million liability coming due in precisely 6.167697 years (Yes,...
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Assume that your employer has a $1.5 million liability coming due in precisely 6.167697 years (Yes, you may assume that's your duration.). The Chief Financial Officer (CFO) of your organization would like to use one of the larger bonds in your portfolio to immunization this liability. The characteristics of the selected bond are: 7.5 years until maturity 6.0% coupon (payments semi-annual) Current Price = 102.500 (not dollars) The CFO fears that instability in the market could reduce the yield on this bond to 3.5% (annually) precisely 2.0 years after purchase. Your task is to prove that whether interest rates remain as is or change in the manner predicted by the CFO, the future value of the cash flows related to this investment will come close (it will not be precise, even if you're diligent) to satisfying the future liability. Assume that your employer has a $1.5 million liability coming due in precisely 6.167697 years (Yes, you may assume that's your duration.). The Chief Financial Officer (CFO) of your organization would like to use one of the larger bonds in your portfolio to immunization this liability. The characteristics of the selected bond are: 7.5 years until maturity 6.0% coupon (payments semi-annual) Current Price = 102.500 (not dollars) The CFO fears that instability in the market could reduce the yield on this bond to 3.5% (annually) precisely 2.0 years after purchase. Your task is to prove that whether interest rates remain as is or change in the manner predicted by the CFO, the future value of the cash flows related to this investment will come close (it will not be precise, even if you're diligent) to satisfying the future liability.
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Related Book For
Advanced Accounting
ISBN: 978-0538480284
11th edition
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng
Posted Date:
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