You are the manager of a pension fund, BU Rocks Pension Plan (BRPP). BRPP's financial situation...
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You are the manager of a pension fund, BU Rocks Pension Plan (BRPP). BRPP's financial situation is: • Assets = 10 million • Duration of assets = 15 years • Liabilities = 8 million • Duration of the liabilities = 15 years Assume the current yield is 7% for both assets and liabilities. Answer the following questions (all duration in this question refers to Macaulay Duration): a) Comment on the following statement: "BRPP's equity holders are pro- tected from interest rate fluctuations because the duration of asset is equal to the duration of liabilities." Is the statement true or false and why? A quantitative analysis is expected. (10 points) b) You look at the asset side of BRPP and find that out of the 10 million assets, 2 million of them are cash. You want to pay out 1 million cash to equity holders. After the cash pay out, what is the duration gap of BRPP? (Hint: cash has duration = zero) (10 points) You are the manager of a pension fund, BU Rocks Pension Plan (BRPP). BRPP's financial situation is: • Assets = 10 million • Duration of assets = 15 years • Liabilities = 8 million • Duration of the liabilities = 15 years Assume the current yield is 7% for both assets and liabilities. Answer the following questions (all duration in this question refers to Macaulay Duration): a) Comment on the following statement: "BRPP's equity holders are pro- tected from interest rate fluctuations because the duration of asset is equal to the duration of liabilities." Is the statement true or false and why? A quantitative analysis is expected. (10 points) b) You look at the asset side of BRPP and find that out of the 10 million assets, 2 million of them are cash. You want to pay out 1 million cash to equity holders. After the cash pay out, what is the duration gap of BRPP? (Hint: cash has duration = zero) (10 points)
Expert Answer:
Answer rating: 100% (QA)
A The Macaulay duration is the weighted average term to maturity of the cash flows from the bond ... View the full answer
Related Book For
Managerial Economics and Business Strategy
ISBN: 978-0071267441
7th Edition
Authors: Michael R. baye
Posted Date:
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