Suppose, you are a CEO of a company and you just made a big investment in...

 

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Suppose, you are a CEO of a company and you just made a big investment in a new production facility. Your Chief Risk Officer provides you with the following information: Your liabilities consist of four $10m payments in years 9, 10, 11, and 12 from now. The current interest rate is R = 1.5%. Your assets are currently worth $40m. Your Chief Risk Officer is concerned that interest rates may go up given that the central bank announced an end to its quantitative easing program. You are worried that changes in interest rates will affect your net worth. Answer the following questions. 1. Will your company gain or lose money if interest rates increase from 1.5% to 2%? 2. You want to immunize your liabilities. Using your $40m in assets, you can invest in 4-year and 12-year zero coupon bonds that pay $100 at maturity. How much do you invest into the 4- and 12-year bond, respectively? Suppose, you are a CEO of a company and you just made a big investment in a new production facility. Your Chief Risk Officer provides you with the following information: Your liabilities consist of four $10m payments in years 9, 10, 11, and 12 from now. The current interest rate is R = 1.5%. Your assets are currently worth $40m. Your Chief Risk Officer is concerned that interest rates may go up given that the central bank announced an end to its quantitative easing program. You are worried that changes in interest rates will affect your net worth. Answer the following questions. 1. Will your company gain or lose money if interest rates increase from 1.5% to 2%? 2. You want to immunize your liabilities. Using your $40m in assets, you can invest in 4-year and 12-year zero coupon bonds that pay $100 at maturity. How much do you invest into the 4- and 12-year bond, respectively?

Answer rating: 100% (QA)

Answer 1 As the liabilities are in future Present value of Liabilities 10 million 10159 10 million 1... View the full answer