8. The Honorable East India Company must pay two liabilities, 100, 000 in exactly three years...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
8. The Honorable East India Company must pay two liabilities, 100, 000 in exactly three years (t = 3) and 120, 000 in exactly five years (t = 5). The current interest rate is 8% effective per year. The company wants to immunize itself from any potential change in interest rates, no matter how large, as the amount of silver and gold introduced to Europe by Spanish conquistadors is causing the rates to deviate frantically. The company will attempt to achieve this by setting three zero-coupon bonds as assets associated with their liabilities, the bonds maturing at times 2, 4 and 6. (a) What form of immunization are they seeking to form: Redington Immunization or Full Immunization? Briefly explain. (b) Calculate the Macaulay duration and convexity for the liabilities, considered as a single portfolio of liabilities. (c) i mmunization they would like to have? If it is, find the redemption amounts (A2, A4, A6) for the three and zero-coupon bonds and justify Is it possible for the company to achieve the form of that they immunize the liabilities. If it is not, explain it is not possible to fully immunize. 8. The Honorable East India Company must pay two liabilities, 100, 000 in exactly three years (t = 3) and 120, 000 in exactly five years (t = 5). The current interest rate is 8% effective per year. The company wants to immunize itself from any potential change in interest rates, no matter how large, as the amount of silver and gold introduced to Europe by Spanish conquistadors is causing the rates to deviate frantically. The company will attempt to achieve this by setting three zero-coupon bonds as assets associated with their liabilities, the bonds maturing at times 2, 4 and 6. (a) What form of immunization are they seeking to form: Redington Immunization or Full Immunization? Briefly explain. (b) Calculate the Macaulay duration and convexity for the liabilities, considered as a single portfolio of liabilities. (c) i mmunization they would like to have? If it is, find the redemption amounts (A2, A4, A6) for the three and zero-coupon bonds and justify Is it possible for the company to achieve the form of that they immunize the liabilities. If it is not, explain it is not possible to fully immunize.
Expert Answer:
Answer rating: 100% (QA)
Answer a As a company wnts to Immunize itself from any potential change in interest rate no matter ... View the full answer
Related Book For
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
Posted Date:
Students also viewed these accounting questions
-
Suppose it is 2020, the 1-year interest rate is 8 percent, and the 10-year rate is 6 percent. a. Draw a graph showing a likely path of the 1-year rate from 2020 through 2029. b. Why might people...
-
Given the following information: Current Interest Rate is 3% There are 3 different scenarios: Interest Rate can stay the same at 3% with probability 0.15 or increase to 5% with probability 0.17 or...
-
Given the following information: Current Interest Rate is 5% There are 3 different scenarios: Interest Rate can stay the same at 5% with probability 1/3 or increase to 6% with probability 1/3 or...
-
What will the following code display? numbers = [1, 2, 3, 4, 5] numbers [2] = 99 print (numbers)
-
Marx Corporation has manufacturing plants in Boston and Chicago. Both plants produce the same product, Xoff, which sells for $20 per unit. Budgeted revenues and costs (in thousands) for the coming...
-
Mighty Muffler, Inc. operates an automobile service facility that specializes in replacing mufflers on compact cars. The following table shows the costs incurred during a month when 600 mufflers were...
-
The author collected sample data by randomly selecting 12 different pages from Harry Potter and the Sorcerers Stone and then finding the number of words in each sentence on each of those pages....
-
Madison Park Co-op, a whole foods grocery and gift shop, has provided the following data to be used in its service department cost allocations: Required: Using the step-down method, allocate the...
-
The transaction of Padilla Services are recorded in the general journal below. Accounting Transactions Date Account Titles and Explanation Debit ($) Credit ($) Jan. 1 Cash 20,000 Notes Payable 20,000...
-
Johnson, an ICAEW Chartered Accountant working as a sole practitioner, acts for Sue, completing her income tax returns. Johnson has recently seen information proving that, on her last two tax...
-
Consider the following. circle: x = h + r cos(8), y = k + r sin(8) Find a set of parametric equations to represent the graph of the conic. (Enter your answers as a comma-separated list of equations.)...
-
1. 2. 3. m A proton speeding through a synchrotron at 3.0x107 experiences a magnetic field of 4 Tat a right angle to its motion that is produced by the steering magnets inside the synchrotron. What...
-
Three charges are arranged as shown in the figure. Find the (a) magnitude and (b) direction (angle with the x axis) of the electrostatic force on the 6.00- nC charge. In the figure, q= 3.64 nC. 0.500...
-
Three point charges are aligned along the x axis as shown in the figure below. (b) = -0.500 m- -4.00 nC Find the electric field at the following positions. (a) (3.80, 0) E = (4.165)i (0, 3.80) Need...
-
Two charges +4.0 C and +18 C are placed along the x axis, with the first charge at the origin (x 00) and the second charge at x = +1.00 m. Find the magnitude and direction of the net force on a -7.0...
-
In the figure below, a square of edge lengths is formed by four spheres of masses, m, M, m3, and m4. What is the x component and the y component of the net gravitational force from them on a central...
-
A woman is standing on a bridge a height H = 4.9m above a river below. A raft is approaching the bridge at a constant velocity v = 5m/s. If the raft is initially a distance D = 10m from the bridge,...
-
Portal Manufacturing has total fixed costs of $520,000. A unit of product sells for $15 and variable costs per unit are $11. a). Prepare a contribution margin income statement showing predicted net...
-
Describe the rationale for why an investor using the equity method must eliminate any intercompany profit or loss on transactions between the investor and the investee.
-
Whom might the accounting convention of conservatism hurt?
-
Working backward from consolidated income statements. Dealco Corporation published a consolidated income statement for the year, shown in Exhibit 13.10. The unconsolidated affiliate retained 25% of...
-
Outline the main factors that might influence the size of the profit mark-up set by a business.
-
A frequent complaint of junior and some senior managers is that they are frequently faced with new targets from above, and that this makes their life difficult. If their complaint is true, does this...
-
When are increased profits in a managers personal interest?
Study smarter with the SolutionInn App