An insurance company must make payments to a customer of $10 million in one year and $5 million in five years. The yield curve is flat at 10%. Required: a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What must be the face value and market value of that zero-coupon bond? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. a. Maturity of zero coupon bond b. Face value b. Market value years million million

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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An insurance company must make payments to a customer of $10 million
in one year and $5 million in five years. The yield curve is flat at 10%.
Required:
a. If it wants to fully fund and immunize its obligation to this customer
with a single issue of a zero-coupon bond, what maturity bond must it
purchase?
Note: Do not round intermediate calculations. Round your answer
to 2 decimal places.
b. What must be the face value and market value of that zero-coupon
bond?
Note: Do not round intermediate calculations. Enter your answers in
millions rounded to 2 decimal places.
a. Maturity of zero coupon bond
b. Face value
b. Market value
years
million
million
Transcribed Image Text:An insurance company must make payments to a customer of $10 million in one year and $5 million in five years. The yield curve is flat at 10%. Required: a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. b. What must be the face value and market value of that zero-coupon bond? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. a. Maturity of zero coupon bond b. Face value b. Market value years million million
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