Pension funds pay lifetime annuities to recipients

Assignment Help Financial Management

Reference no: EM131519587

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 $2.4 million per year to beneficiaries. The yield to maturity on all bonds is 15.2%.

a. If the duration of 5-year maturity bonds with coupon rates of 12.5% (paid annually) is 4 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. Omit the "$" sign in your response.)

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. Enter your answer in millions rounded to 2 decimal places. Omit the "$" sign in your response.)

Par value $ million

Reference no: EM131519587

Questions Cloud

Indicate which accounts should be debited : Below are several external transactions for Hokies Company. Purchase equipment in exchange for cash.

Select a us federal government strategy document : Select a US federal government strategy document and compare and contrast it to a strategy document from another governmental entity.

Role and importance of planning to contemporary business : MGT100-The role and importance of planning to contemporary business and the role and importance of culture and diversity in organisations

Does the movie or book realistically reflect impact of art : Analyze the movie or work of literature's relevance to this course. Does the movie or book realistically reflect the impact of art education on adolescents?

Pension funds pay lifetime annuities to recipients : Pension funds pay lifetime annuities to recipients. What will be the par value of your holdings in the 20-year coupon bond?

Why companies might want to minimize the use of email : Comment on the accuracy of the following statement: 'The communication process is more effective when ambiguity is minimized.

State automobile license renewals operations : Jessica, the manager of an Atlanta branch office of the state Department of Motor Vehicles, attempted to perform an analysis of the driver's license renewal.

Discuss the external transactions for terapin company : Terapin Company engages in the following external transactions for November.

Establish the existence the trend : Choose a subject-an event, a phenomenon, or a trend-that invites you to speculate about its cause.

User Account

All Pages