Question: Estimate teacher, I have a doubt about solving this problem. Thank you in advance Suppose you are managing a pension fund with obligations to make

Estimate teacher, I have a doubt about solving this problem. Thank you in advance

Suppose you are managing a pension fund with obligations to make perpetual payments of

$3 million per year to beneficiaries. The YTM on all bonds is 4%.

a. If the duration of 3-year maturity bonds with coupon rates of 12% (paid

annually) is 2 years and the duration of a 5-year maturity bonds with coupon

rates of 6% (paid annually) is 4 years, how much of these coupon bonds (in

market value) will you want to hold to both fully fund and immunize your

obligation?

b. What would be the par value of your holdings on the 5-year coupon bond?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Q:

Please solve for data group 3. Thank you in advance! Please solve for data group 3. Thank you in advance! Don't know for sure if this is relevant to the question: Question 4: Bond Portfolio...

Q:

Please solve for data group 3. Thank you in advance! Question 4: Bond Portfolio Management Pension funds pay lifetime annuities to recipients. If a firm remains in business indefi- nitely, the...

Q:

PLEASE HELP WITH PART "B" OF THIS QUESTION. THANK YOU! Return to question Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation...

Q:

Problem 11-16 Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are...

Q:

Problem 16-3 A 9-year bond has a yield of 9% and a duration of 7.386 years. If the market yield changes by 60 basis points, what is the percentage change in the bond's price? (Do not round...

Q:

Question 1 (8 Marks). a. A bond with a coupon rate of 8% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on...

Q:

a. A bond with a coupon rate of 8% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on February 16 at 101% of the...

Q:

A bond with a coupon rate of 8% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on February 16 at 101% of the par...

Q:

Question 1 (8 Marks). a. A bond with a coupon rate of 8% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on...

Q:

Pension funds pay lifetime annuities to recipients. If a firm remains in business indefi- nitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a...

Q:

#6. Determine whether each of the improper integrals is convergent or divergent. (b) de #7. Determine whether each of the following series converges or diverges. If the series converges, find its...

Q:

A piston/cylinder has 0.5 kg air at 2000 kPa, 1000 K as shown. The cylinder has stops so Vmin = 0.03 m3. The air now cools to 400 K by heat transfer to the ambient. Find the final volume and pressure...

Q:

In general, people who retire early miss their work colleagues and soon return to work feel that they have made the right decision if they have enough money quickly abandon their fantasies of taking...

Q:

A bond with a face value of $1,000 and a coupon rate of 6% pays interest semi-annually. If the bond matures in 5 years and the market interest rate is 8%, calculate the bond's current yield, yield to...