Question
In: Finance
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the...
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $1.9 million per year to beneficiaries. The yield to maturity on all bonds is 19.0%.
a. If the duration of 5-year maturity bonds with coupon rates of 11.8% (paid annually) is four years and the duration of 20-year maturity bonds with coupon rates of 7% (paid annually) is 11 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.)
b. What will be the par value of your holdings in the 20-year coupon bond?
Solutions
Expert Solution
PAR VALUE OF HOLDING IS TAKEN TO 2 DECIMALS, AS NOTHING
WAS MENTIONED
jeff jeffy answered 1 year agoRelated Solutions
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the...
Pension funds pay lifetime annuities to recipients. If a firm
will remain in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $1.7
million per year to beneficiaries. The yield to maturity on all
bonds is 18.0%.
a. If the duration of 5-year maturity bonds with coupon rates of
8.0% (paid annually) is four years and the duration of 20-year
maturity bonds with coupon...
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the...
Pension funds pay lifetime annuities to recipients. If a firm
will remain in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $3.4
million per year to beneficiaries. The yield to maturity on all
bonds is 18.5%.
a. If the duration of 5-year maturity bonds
with coupon rates of 14.6% (paid annually) is four years and the
duration of 20-year maturity bonds with coupon...
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the...
Pension funds pay lifetime annuities to recipients. If a firm
will remain in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $1.5
million per year to beneficiaries. The yield to maturity on all
bonds is 12.0%.
a. If the duration of 5-year maturity bonds
with coupon rates of 13.0% (paid annually) is four years and the
duration of 20-year maturity bonds with coupon...
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the...
Pension funds pay lifetime annuities to recipients. If a firm
will remain in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $1.8
million per year to beneficiaries. The yield to maturity on all
bonds is 11.0%.
a. If the duration of 5-year maturity bonds
with coupon rates of 8.5% (paid annually) is four years and the
duration of 20-year maturity bonds with coupon...
Pension funds pay lifetime annuities to recipients. If a firm expects to remain in business indefinitely,...
Pension funds pay lifetime annuities to recipients. If a firm
expects to remain in business indefinitely, its pension obligation
will resemble a perpetuity. Suppose, therefore, that you are
managing a pension fund with obligations to make perpetual payments
of $2 million per year to beneficiaries. You consider using the
following two bonds to immunize your obligation. Assume the yield
to maturity on all bonds is 10%.
Bond
Par
Maturity
Coupon
Yield to Maturity
A
1,000
5-year
10%, Annual Payment
10%...
16-5 Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely,...
16-5
Pension funds pay lifetime annuities to recipients. If a firm
will remain in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $1.9
million per year to beneficiaries. The yield to maturity on all
bonds is 19.0%.
1) If the duration of 5-year maturity bonds with coupon rates of
11.8% (paid annually) is four years and the duration of 20-year
maturity bonds with...
Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension...
Pension funds pay lifetime annuities to recipients. If a firm
remains in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $2.6
million per year to beneficiaries. The yield to maturity on all
bonds is 16%.
a. If the duration of 5-year maturity bonds with coupon rates of
12% (paid annually) is 4.0 years and the duration of 20-year
maturity bonds with coupon rates...
Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension...
Pension funds pay lifetime annuities to recipients. If a firm
remains in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $2.6
million per year to beneficiaries. The yield to maturity on all
bonds is 16%.
a. If the duration of 5-year maturity bonds with
coupon rates of 12% (paid annually) is 4.0 years and the duration
of 20-year maturity bonds with coupon rates...
Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension...
Pension funds pay lifetime annuities to recipients. If a firm
remains in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $2.5
million per year to beneficiaries. The yield to maturity on all
bonds is 20%.
a. If the duration of 5-year maturity bonds with
coupon rates of 16% (paid annually) is 3.7 years and the duration
of 20-year maturity bonds with coupon rates...
Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension...
Pension funds pay lifetime annuities to recipients. If a firm
remains in business indefinitely, the pension obligation will
resemble a perpetuity. Suppose, therefore, that you are managing a
pension fund with obligations to make perpetual payments of $4.2
million per year to beneficiaries. The yield to maturity on all
bonds is 20%.
a. If the duration of 5-year maturity bonds with
coupon rates of 16% (paid annually) is 3.7 years and the duration
of 20-year maturity bonds with coupon rates...
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