You are thinking of pursuing an actuarial career, so you have agreed to serve as an intern at Love Actuaries LLP. The managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations. Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments.Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against interest rate risk.Thirdly, client Colin Limited’s pension plan obligation has a duration of 16 and a convexity of 29. Colin’s immunization strategy will use 3 bonds, issued by firms named Eleonore, Frissel, and Greta, respectively. The bonds have the following parameters: Bond Duration ConvexityEleonore 9.00 29.00Frissel 21.00 35.00Greta 28.00 56.00Required: What is the duration of Annie’s required pension payments?Hint: Starting with Spreadsheet 16.1 of Bodie_9Ce_Ch16.xlsx, copy the formulas for coupon bonds, adjusting them to extend for the full 40 years of payments, and determine the duration.Calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against interest rate risk. (Again, modify Spreadsheet 16.1 for the coupon bond’s duration.)What weights should Ms. Thompson recommend for Colin’s strategy? AutoSave OFFHome Insert Draw123456PasteB22XAA. 8% coupon bondReadyGenevaBI USum:fxSum:PeriodBSpreadsheet 16.1Page Layout123+4123+✓ C...40.05VCTime untilPayment(Years)0.51.01.52.010Accessibility: Good to go0.51.01.52.0Formulas78910 B. Zero-coupon bond111213141516 Semiannual int rate:1718 *Weight = Present value of each payment (Column E) divided by the bond price1920212223242526272829303132333435363738394041424344454647VVΑ' Α΄A.VDSpreadsheet 16.2Cash flow4040401040Data0001000ReviewEPV of CF(Discount rate=5% per period)38.09536.28134.554855.611964.5400.0000.0000.000822.702822.702Spreadsheet 16.3abFViewWeight*0.03950.03760.03580.88711.00000.00000.00000.00001.00001.0000+Tell meabWrap Text vMerge & Center ✓GColumn (C)timesColumn (F)0.01970.03760.05371.77411.88520.00000.00000.00002.00002.0000HBodie_9Ce_Ch16General$V% 9J.00✈0VConditional FormatFormatting as TableKLCellStylesDNNMInsert vDelete ✓Format vNWE1889ΣVVAP. O.V|8Find &Sort &Filter SelectO1.9IPShareAnalyzeDataCommentsJasperactivefor Office99%R

A bond depicts a debt instrument that allows its issuer to raise funds from the public. The bond…

Answered: O. Paste 822 28 29 Geneva A. 8% coupon…

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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You are thinking of pursuing an actuarial career, so you have agreed to serve as an intern at Love Actuaries LLP.

The managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations.

Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments.

Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against interest rate risk.

Thirdly, client Colin Limited’s pension plan obligation has a duration of 16 and a convexity of 29. Colin’s immunization strategy will use 3 bonds, issued by firms named Eleonore, Frissel, and Greta, respectively.

The bonds have the following parameters:

Bond	Duration	Convexity
Eleonore	9.00	29.00
Frissel	21.00	35.00
Greta	28.00	56.00

Required:

What is the duration of Annie’s required pension payments?
Hint: Starting with Spreadsheet 16.1 of Bodie_9Ce_Ch16.xlsx, copy the formulas for coupon bonds, adjusting them to extend for the full 40 years of payments, and determine the duration.
Calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against interest rate risk. (Again, modify Spreadsheet 16.1 for the coupon bond’s duration.)
What weights should Ms. Thompson recommend for Colin’s strategy?

AutoSave OFF
Home Insert Draw
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11
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