Question: how to solve this exercise ? Problem A company has a liability of $100, 000 in two years time. The two year rate is 5%

how to solve this exercise ?

Problem A company has a liability of $100, 000 in two years time. The two year rate is 5% pa. and is compounded semi-annually. The company has also an access to the following bonds: Bond Face Value Maturity (Years) Coupon Rate Coupon Frequency Yield BI $100,000 1.0 6% 2 4% B2 $5.000 1.5 8% 2 3% a. Compute the present values of the liability and the two bonds. b. Compute the modified durations of the liability and the two bonds. c. Using the two bonds, construct a hedge portfolio for the liability which is as insensitive to a (small) parallel shift in the interest rate and bond yields as possible

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 Mathematics Questions!

Help me to solve this task please:) Problem A company has a liability of $100, 000 in two years time. The two year rate is 5% pa. and is compounded semi-annually. The company has also an access to...

Project Case: Accu Drilling Accu Drilling Supplies has been growing steadily and the company has decided to expand their facilities to meet the increased demand. Management allocated $3 million for...

Given the following information on a bond, Par value: $1000 Interest rate: 6% Coupon rate: 8% paid semiannually Years to maturity: 15 years, what is the expected price at the end of year 5? Select...

1.Future Value: Ordinary Annuity versus Annuity Due What is the future value of a 3%, 5-year ordinary annuity that pays $250 each year? Round your answer to the nearest cent. $ If this were an...

Question 1 Alfredo has two offers for his grocery shop. The first offer is a cash payment of $60,000, and the second is a down payment of $10,000 with payments of $6,000 at the end of each semiannual...

1. What is the discount rate assuming the present value of $840 at the end of 1-year is $765? 2. What is the Future value of $3,500 deposited for 12 years at 5% compounded annually? 3. If $2,800 is...

A company has a liability of $10,00,000 in three years time and wants to hedge this liability with the followins semiannual bonds: Maturity Face Value Coupon Yield 2 100,000 5% 4.8% 5 100,000 6% 5.0%...

I need help solving the following 25 Accounting and Finance questions with examples. Please see attached document. Pt 2 ACC/561 and FIN/571 1 Intanke Inc. manufactures vacuum cleaners. The following...

51. The cumulative discounted cash flow diagram for a process is shown in Eigure P10.51; all numbers are given in Smillion and have been discounted to time t-0. The project life is ten years after...

Consider a completely-mixed tank (CSTR) where a reactive substance (Toxicrud) has a first- order decay rate of 3.2 hr". The tank dimensions are 8 ft deep by 12 ft square (width and length), with one...

Going forward, what are the most serious challenges facing Birchbox? Which of these challenges do you believe is the most threatening to the firms success? Why?

An estimate of allowance for doubtful accounts will increase the current assets on the income statement. decrease the current assets on the balance sheet. increase the current assets on the balance...

Which of the following is not a good example of a company s resources? Multiple Choice having a lower cost value chain than key rivals having a well - known brand name and enjoying the confidence of...

Explain the concept of equal employment opportunity.

Explain the various job analysis methods.

Describe the components of a job description.