Using a discount rate of 5.5% compounded annually, a pension fund estimates that the present value of its assets and liabilities are $7 million and $4 million, respectively. The duration of the assets is 11 years and the duration of the liabilities is 27 years. (a) Suppose that the interest rate decreases to 5.45%. Estimate the relative changes in the fund's assets and liabilities. Express yours answers as percentages, to the nearest basis point. Relative Change in Assets % Relative Change in Liabilities = % (b) Using your rounded answers from (a), estimate the absolute changes in the fund's assets and liabilities. Express your answers in millions of dollars, to the nearest thousand. Absolute Change in Assets = $ million Absolute Change in Liabilities $ million (c) The fund's net worth is defined as the difference between its assets and liabilities. Using your answers from (b), estimate the relative change in the fund's net worth. Express your answer as a percent, to the nearest basis point. Relative Change = %
Using a discount rate of 5.5% compounded annually, a pension fund estimates that the present value of its assets and liabilities are $7 million and $4 million, respectively. The duration of the assets is 11 years and the duration of the liabilities is 27 years. (a) Suppose that the interest rate decreases to 5.45%. Estimate the relative changes in the fund's assets and liabilities. Express yours answers as percentages, to the nearest basis point. Relative Change in Assets % Relative Change in Liabilities = % (b) Using your rounded answers from (a), estimate the absolute changes in the fund's assets and liabilities. Express your answers in millions of dollars, to the nearest thousand. Absolute Change in Assets = $ million Absolute Change in Liabilities $ million (c) The fund's net worth is defined as the difference between its assets and liabilities. Using your answers from (b), estimate the relative change in the fund's net worth. Express your answer as a percent, to the nearest basis point. Relative Change = %
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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Transcribed Image Text:Using a discount rate of 5.5% compounded annually, a pension fund estimates that the present value of its assets and liabilities are $7 million and $4
million, respectively. The duration of the assets is 11 years and the duration of the liabilities is 27 years.
(a) Suppose that the interest rate decreases to 5.45%. Estimate the relative changes in the fund's assets and liabilities. Express yours answers as
percentages, to the nearest basis point.
Relative Change in Assets
%
Relative Change in Liabilities
%
(b) Using your rounded answers from (a), estimate the absolute changes in the fund's assets and liabilities. Express your answers in millions of dollars, to
the nearest thousand.
Absolute Change in Assets $
million
Absolute Change in Liabilities s $
million
(c) The fund's net worth is defined as the difference between its assets and liabilities. Using your answers from (b), estimate the relative change in the
fund's net worth. Express your answer as a percent, to the nearest basis point.
Relative Change =
%
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