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Alpha Insurance Company is obligated to make payments of $2 million, $3 million, and $4 million...

Alpha Insurance Company is obligated to make payments of $2 million, $3 million, and $4 million at the end of the next three years, respectively. The market interest rate is 8% per annum.

i. Determine the duration of the company’s payment obligations.

ii. Suppose the company’s payment obligations are fully funded and immunized using both 6-month zero coupon bonds and perpetuities. Determine how much of each of these bonds the company will hold in the portfolio. (7 marks )

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

FOR SECOND PART, IT IS NOT MENTIONED, THAT ANSWER SHOULD BE WEIGHTS OF 2 BONDS OR AMOUNTS, SO BOTH ANSWERS ARE STATED. ROUNDING IS ALSO NOT MENTIONED. SO IF ANY CHANGE IS NEEDED, LET ME KNOW

jeff jeffy answered 9 months ago
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