Question

suppose that you have the following bonds:

1-year ZCB, face value 1, priced at 0.98

2 year ZCB, face value 1, priced at 0.95

3-year ZCB, face value 1, priced at 0.92

4-year ZCB, face value 1, priced at 0.88

A life insurance company anticipates the following payments: $100 in one year, $250 in two years, $300 in three years, and $350 in four years..

What answer is closest to the total present value of the life insurance company’s anticipated payments? a) $880 b) $900 c) $920 d) $950 e) $980 f) $1000

8. What answer is closest to the duration of the life insurance company’s anticipated payments? a) 2.0 year b) 2.5 years c) 3.0 years d) 3.5 years e) 4.0 years

9. Given your calculation above, if you were interested in matching the life insurance company’s assets to its liabilities so that small interest rate changes would change the asset present values by about the same amount as the payment present values, and you had the present value of the payments to invest, would you rather invest in the 1-year ZCB or the 3-year ZCB?

Answer 1