**Text for Educational Website:****Pension Fund Duration and Immunization**A pension plan is set to pay $10,000 once a year for a 10-year period. The first payment will occur in exactly five years. The pension fund aims to immunize its position against interest rate changes.**Tasks to Complete:**a. **Determine the Duration of Obligation:** - Calculate the duration of the pension fund's obligation to you given the current interest rate of 10% per year.b. **Constructing an Immunized Position:** - If the pension plan utilizes 5-year and 20-year zero-coupon bonds to create an immunized position, determine how much money should be allocated to each bond.c. **Face Value of Holdings:** - Calculate the face value of the holdings in each zero-coupon bond.**Interactive Questions and Inputs:**1. **Required A:** - Calculate the duration with the provided interest rate, and input the result rounded to four decimal places. - Answer box: Duration = 1.8583 years (example provided).2. **Required B & C:** - Further interaction sections to answer part b and c, guiding through bond investment and face value calculations.This structured approach aids in understanding pension fund duration and immunization, facilitating calculations through an interactive, step-by-step online interface.

Bond valuation seeks to ascertain a bond's intrinsic worth. It entails determining the present value…

Required: a. What is the duration of its obligation to me? The current interest rate is 10% per year. b. If the plan uses 5-year and 20-year zero-coupon bonds to construct the immunized position, how much money ought to be placed in each bond? c. What will be the face value of the holdings in each zero?

Required: a. What is the duration of its obligation to me? The current interest rate is 10% per year. b. If the plan uses 5-year and 20-year zero-coupon bonds to construct the immunized position, how much money ought to be placed in each bond? c. What will be the face value of the holdings in each zero?

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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3. Suppose that you observe the following two bonds being traded, both of which pay coupons annually and have a $100 face value: Bond Coupon Maturity Rate A B 6% 2% 30 years 30 years Price $147.13 $64.47 If the Law of One Price holds, what is the price of a 30-year Annuity that pays $8 per year starting at t = 1?
Hello Can you show how the computation was made from the solutions guide
1
3. What is the present value of a $20,000 payment you would receive 5 years from now, assuming an annual interest rate of 7%? 4. What is the future value 6 years from now of $15,000 you hold today when the annual interest rate is 4%? 5. What is the current price of a discount bond with a face value of $10,000 and an interest rate of 6%? 1
Which of the following investments that pay will $9,500 in 14 years will have a lower price today? The security that earns an interest rate of 5.50%. The security that earns an interest rate of 8.25%.
Which of the following investments that pay will $18,500 in 8 years will have a higher price today? The security that earns an interest rate of 8.50%. The security that earns an interest rate of 12.75%.
Suppose the interest rate on a 1-year government bond is 3.00%, on a 4-year government bond is 3.50% and that on a 6-year government bond is 4.90%. What is the market's forecast for 2-year rates 4 years from now, assuming the pure expectations theory is correct? Show your work.
1. Suppose the interest rate on a one-year bond today is 6% per year, the interest rate on a one-year bond one year from now is expected to be 4% per year, and the interest rate on a one-year bond two years from now is expected to be 3% per year. The term premium on a two-year bond is 0.5% per year and the term premium on a three-year bond is 1.0 % per year. In equilibrium, what is the interest rate today on a two-year bond? On a three-year bond? What is the shape of the yield curve?
1. Present discounted value (you might want to use a calculator or excel to compute this) a) Suppose a bond pays a coupon of 200$ for four years and a face value of 2000$ in year five. If the discount rate is 8%, what is the Present Discounted Value of this bond? b) If Nilly discounts the future at 5%, what is the maximum amount they’d be willing to pay for a 1 year, no coupon, 10000$ bond? If Shifty discounts the future at 10% what is the minimum amount they’d be willing to accept for the same bond? c) Suppose an investment project costs 1000$ upfront (year 2022), 1000$ next year (2023), then 500$ in years 2024 and 2025 each. Then it pays benefits of 1500$ for the following three years (2026, 2027, 2028). If the discount rate is 10%, is the project worth it?
How much will the coupon payments be of a 20-year $5,000 bond with a 4% coupon rate and semiannual payments?
Suppose our corporation can borrow in EUR at 0.06% for 1 year. The current exchange rate is USD1.10/EUR, and the EUR is expected to appreciate against the dollar to USD1.2/EUR. What is the interest rate cost of the bond in USD? Please enter your answer as % -- e.g. if your answer is 2.34% type in 2.34.
(i) If investors have demanded an interest rate of 5 percent on the bond investment, what is the maximum prices to pay for the 1-year bond and 30-year bond? (ii) Suppose that the interest rate has increased to 20%, calculate the values of the 1-yearbond and 30-year bond.(iii) Based on the calculations in parts (b) (i) and (ii) above, explain with reasons thefundamental relationship between interest rates and bond maturity. (iv) Briefly explain the meaning of the terms “bond’s coupon rate”, “current yield”, and“yield to maturity”. (v) Explain why bonds have protective covenants.

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