How much of each of these coupon bonds will you want

Assignment Help Financial Management

Reference no: EM132012863

Suppose that you are managing a pension fund with obligations to make perpetual payments of $3.7 million per year to beneficiaries. The required rate of return 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 of 9% (paid annually) is 6.3 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 20%.

[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 2 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: EM132012863

Questions Cloud

What will be the firms cash cycle : Assuming that all of LilyMac's sales are on credit, what will be the firm's cash cycle?

Actions taken by the UAE government to fulfill UAE visions : This assignment is based on politics. Then you have to mention the actions taken by the UAE government to fulfill those visions

Explain the arbitrage bounds on the 1-year forward contracts : What are the arbitrage bounds on the 1-year forward contracts? Make sure to label the bound on the bid and the ask price.

Excited atom loses energy : Assume that an electron of a hydrogen atom has been excited to the n=5 level. When this is excited atom loses energy, it emits lights of 10 different wavelength

How much of each of these coupon bonds will you want : How much of each of these coupon bonds (in $ market value) will you want to hold to fully fund and immunize your obligation?

Molar entropies for substances : Why are we able to determine absolute molar entropies for substances without having to make a arbitrary starting point

Explain the process by which a water softener works : Explain the process by which a water softener works, please include the regeneration process.

Titrating an unknown acid : How would using a jar that was left open for a significant period of time affect the results when titrating an unknown acid?

Show the investors beginning t account : What is the actual margin at a share price of $40? Calculate the investor's return for the 125 day holding period.

User Account

All Pages