Example 6-2 13 49 Suppose that it is 2022 and an insurer must make a guaranteed...

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Example 6-2 13 49 Suppose that it is 2022 and an insurer must make a guaranteed payment to an investor in five years, 2027. We assume that this target guaranteed payment is $1,480,000, a lump sum policy payout on retirement, equivalent to investing $1,000,000 at a semiannually compounded rate of 8 percent over five years. To immunize or protect itself against interest rate risk, the insurer needs to determine which investments would produce a cash flow of exactly $1,480,000 in five years, regardless of what happens to interest rates in the immediate future. Note that the liability duration is 5 years. What should the asset duration be to protect ourselves from any changes in interest rates? Given a $1,000 face value and an 8 percent yield and assuming semiannual compounding, the current price per five-year STRIPS is? How many of these bonds she needs to buy? Example 6-2 13 49 Suppose that it is 2022 and an insurer must make a guaranteed payment to an investor in five years, 2027. We assume that this target guaranteed payment is $1,480,000, a lump sum policy payout on retirement, equivalent to investing $1,000,000 at a semiannually compounded rate of 8 percent over five years. To immunize or protect itself against interest rate risk, the insurer needs to determine which investments would produce a cash flow of exactly $1,480,000 in five years, regardless of what happens to interest rates in the immediate future. Note that the liability duration is 5 years. What should the asset duration be to protect ourselves from any changes in interest rates? Given a $1,000 face value and an 8 percent yield and assuming semiannual compounding, the current price per five-year STRIPS is? How many of these bonds she needs to buy?