Compute the present value and duration of liabilities first

Assignment Help Financial Management

Reference no: EM132022970

Suppose that you are managing a pension fund with obligations to make perpetual payments of $1.2 million per year to beneficiaries. The required rate of return is 16%.

a. If the duration of 5-year maturity bonds with coupon rates of 8% (paid annually) is 4.2 years and the duration of 20-year maturity bonds with coupon rates of 4% (paid annually) is 8.6 years, how much of each of these coupon bonds (in $ market value) will you want to hold to fully fund and immunize your obligation? The yield to maturity on both bonds is 16%.

[Hint: compute the present value and duration of liabilities first. This provides the dollar amount and target duration you will need to match with an investment in the two coupon bonds above.]

(Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)

Holdings

5-year bond $ million

20- year bond $ million

b. What will be the par value of your holdings in the 20-year coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Par value $ million

Reference no: EM132022970

Questions Cloud

What is the company ebit in given case : Olin Transmissions, Inc., has the following estimates for its new gear assembly project: price = $168 per unit; variable costs = $34 per unit.

What is the macaulay duration : What is the yield to maturity for a $1,000 par value bond with a coupon rate of 9%, semi-annual payments, 12 years to maturity,

What will be total revenues if the firm remains un-hedged : An oil marketing company is concerned about volatility in its revenues. oil currently sells for $120 a barrel. but the price is volatile and could fall.

What is its expected rate of return : Now assume that the stock is currently selling at $30.29. What is its expected rate of return? What is the firm’s current estimated intrinsic stock price?

Compute the present value and duration of liabilities first : What will be the par value of your holdings in the 20-year coupon bond? compute the present value and duration of liabilities first.

What are the estimated cost savings : What are the estimated cost savings by scheduling the tests to be run by at night, when no production processes are occurring

How many shares should strong insist on today : Given these beliefs, how many shares should Strong insist on today if his target rate of return is 50%? (The assumption here is that a wise venture capitalist).

Resource investments throughout the organization : How can a person amortize their fixed costs and resource investments throughout the organization?

Bond price-what price would be predicted by duration rule : Find the exact price of the bond if it's yield to maturity rises to 9%. What price would be predicted by the duration rule?

User Account

All Pages