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Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $2.3 million per year to beneficiaries. The yield to maturity on all bonds is 14.2%.
a. If the duration of 5-year maturity bonds with coupon rates of 11.5% (paid annually) is 4 years and the duration of 20-year maturity bonds with coupon rates of 6% (paid annually) is 11 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place. Omit the "$" 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 References Book & Resources.
Robert Gillman, an equity research analyst at Gillman Advisors, believes in efficient markets. He has been following the mining industry for the past 10 years and needs to determine the constant-growth rate that he should use while valuing Pan Asia M..
You have some extra cash this month and you are considering putting it toward your car loan. Your interest rate is 6.6%, your loan payments are $664 per month, and you have 36 months left on your loan. If you pay an additional $1,100 with your next r..
The amount of money that would be in the account if you left the money there until your 65th birthday is closest to:
Allen Lumber Company had earnings after taxes of $500,000 in the year 2009 with 420,000 shares outstanding on December 31, 2009. On January 1, 2010, the firm issued 25,000 new shares. Because of the proceeds from these new shares and other operating ..
A bond that matures in 10 years sells for $1,190. The bond has a face value of $1,000 and a yield to maturity of 9.7489%. The bond pays coupons semiannually. What is the bond's current yield?
What are the similarities and differences between minimization and maximization problems using the graphical solution approaches of LP?
How might a bank adjust its credit policies if the area expierneces a sudden or dramatic downturn? Suggest two adjustments the bank should make when applying the five C's of credit in such a situation.
Which of the following is NOT part of a project's initial cash outflow?
Assume that the expectations theory holds, and that liquidity and maturity risk premiums are zero. If the annual rate of interest on a 2-year Treasury bond is 5.1 percent and the rate on a 1-year Treasury bond is 3 percent, what rate of interest shou..
Genoa ltd is about to start a new project that will have a Net Present Value of $100 million. The stock currently trades at $105 and there are 2,000,000 shares outstanding. In order to start the project the company needs to raise $400,000,000 in new ..
John Doeber borrowed $160,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?
A borrower is considering a 1-year adjustable rate mortgage of $250,000 that starts at 2.5%, 30 year amortization. The margin is 2.25%. The annual change caps are 2% per year. The current index is 1.25%. The life cap is 6% over the start rate. What i..
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