An insurance company must make payments to a customer of $8 million in 1 year and $4 million in 4 years. The yield curve is flat at 9%. 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? (Do not "round intermediate calculations. Round your answer to 4 decimal places.) Maturity of zero coupon bond years What must be the face value and market value of that zero-coupon bond? (Do not round intermediate calculations. Enter your answers in millions b. rounded to 2 decimal places. Omit the "S" sign in your response.) Face value Market values

An insurance company must make payments to a customer of $8 million in 1 year and $4 million in 4 years. The yield curve is flat at 9%. 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? (Do not "round intermediate calculations. Round your answer to 4 decimal places.) Maturity of zero coupon bond years What must be the face value and market value of that zero-coupon bond? (Do not round intermediate calculations. Enter your answers in millions b. rounded to 2 decimal places. Omit the "S" sign in your response.) Face value Market values

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

Section: Chapter Questions

Problem 1PS

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An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%. 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? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Maturity of zero coupon bond _____Years b. What must be the face value and market value of that zero-coupon bond? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value_____ Millions $ Market Value______ Millions $
An insurance company must make payments to a customer of $9 million in one year and $6 million in six years. The yield curve is flat at 7%. 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. Answer is complete but not entirely correct. 12,410,000.00 years x million x million a. Maturity of zero coupon bond b. Face value b. Market value $ 14,810,000.00 12,410,000.00 $ 4
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
An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%.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?b. What must be the face value and market value of that zero-coupon bond?
An insurance company must make payments to a customer of $20 million in 1 year and $8 million in 5 years. The yield curve is flat at 10%. 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? (in years, use four decimal places) What must be the face value and market value of that zero-coupon bond? (in millions, use two decimal places)
An insurance company is thinking about purchasing bonds A and B with zero coupons to cover some of its future liabilities. The redemption periods for these zero-coupon bonds are seven and twenty years, respectively.£11 million is due in 11 years, and £14 million is due in 16 years, according to the list of its liabilities.Determine bond B's value at an effective 5% annual interest rate so that Redington's theory of immunization's first two requirements are met. (correct answer=6.419) (using formulas, no tables)
You will be paying $8,600 a year In tultion expenses at the end of the next two years. Bonds currently yleld 7%. Q. What is the present value and duration of your obligation? b. What maturity zero-coupon bond would Immunize your obligation? c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately Increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tultion obligation? d. What if rates fall Immediately to 5% ? Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D What is the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.) \table[[,,,],[Present value,,,,,],[Duration,,years,,,]]
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $983.78 865.89 797.92 732.00 660.24 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4?
Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Price $ 996.04 895.89 833.92 772.80 675.18 Required: a. Suppose that you buy today one 3-year maturity zero-coupon bond with face value $1,000. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero (specifically, what must be the total face value of those 5-year zeros)? b. What are the cash flows on this strategy in each year? c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan? d. & e. Confirm that the effective 2-year forward interest rate equals (1 + f4) ×(1 + f5)-1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last two years. Alternatively, show that the effective 2-year forward rate equals (1 + y5) 15 + (1+y3) ³. - 1
Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Required: a. Calculate the forward rate of interest for each year. b. How could you construct a 1-year forward loan beginning in year 3? c. How could you construct a 1-year forward loan beginning in year 4? Required A Price $940.93 Complete this question by entering your answers in the tabs below. 868.39 800.92 735.40 670.48 Required B Maturity (years) 2 3 Calculate the forward rate of interest for each year. Note: Round your answers to 2 decimal places. Required C Forward Rate % % Prov 12 of 12 Next
A 1-year corporate bond will pay the following: 1. The promised amount of $10,000, with probability 70%. 2. only $9,000 with probability 29%; and 3. nothing with probability 1% 1) If the risk-free market interest rate is 5%, what minimum promised interest rate must the lender demand just to break even , 2) Then, what would be the default premium on this bond under a risk-neutral world. 3) If the bond, however, has a promised rate of return of 11%, what is the risk premium on this bond under a risk-averse world
For each of the following situations, write the equation needed to calculatethe yield to maturity, denoted by i. You do not solve for i; just write the appropriateequations. A simple loan for $350,000 that requires a payment of $475,000 in fiveyears.A discount bond (zero-coupon bond) with a price of $720 that has aface value of $1,000 and matures in five years.A corporate bond with a face value of $1,000, a price of $950, a couponrate of 8% paid annually, and a maturity of six years.A student loan of $40,000 that requires payments of $2,750 per yearfor 20 years. The payments start in three years.

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