An insurance company must make payments to a customer of £10 million in one year and £4 million in five years. The yield curve is flat at 10%. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero- coupon bond, what maturity bond must it purchase?
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An insurance company must make payments to a customer of £10 million in one
year and £4 million in five years. The yield curve is flat at 10%. If it wants to fully
fund and immunize its obligation to this customer with a single issue of a zero-
coupon bond, what maturity bond must it purchase?
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- Suppose a 10-year, 10% semiannual coupon bond with a par value of 1,000 is currently selling for 1,135.90, producing a nominal yield to maturity of 8%. However, the bond can be called after 5 years for a price of 1,050. (1) What is the bonds nominal yield to call (YTC)? (2) If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%.a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase?b. What must be the face value and market value of that zero-coupon bond?An insurance company must make payments to a customer of $20 million in 1 year and $8 million in 5 years. The yield curve is flat at 10%. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? (in years, use four decimal places) What must be the face value and market value of that zero-coupon bond? (in millions, use two decimal places)
- An insurance company must make payments to a customer of $10 million in one year and $4 million in five years. The yield curve is flat at 10%. a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Maturity of zero coupon bond _____Years b. What must be the face value and market value of that zero-coupon bond? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value_____ Millions $ Market Value______ Millions $A 10 year bod of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently negotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What is (a) the stated and (b) the expected yield to maturity of the bonds? The bond makes its coupon payments annually.An insurance company must make a payment of $19,487 in seven years. The current yield curve in the market is flat at 10% per annum for all maturities. The company’s portfolio manager wishes to fully fund this obligation using a two-bond portfolio that is composed of two bonds: (1) a three-year zero-coupon bond and (2) a perpetuity paying annual coupons. (b) To immunize the company’s obligation, what should be the total market value of the three-year zero-coupon bond in the two-bond portfolio now? What is the total face value of the three-year zero-coupon bonds in the two-bond portfolio? (c) Carefully explain why bond duration is lower for a bond with high coupons than for a bond with low coupons, assuming that all other characteristics of the bonds are the same. (d) If the yield to maturity of a 10-year zero-coupon bond is up by 50 basis points from…
- A 10-year bond of a firm in severe financial distress has a coupon rate of 14% and sells for $900. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What is (a) the stated and (b) the expected yield to maturity of the bonds? The bond makes its coupon payments annually.After setting aside the required reserves, the bank decides to invest the remaining amount of cash. The bank invests £15 million in a coupon bond issues by UK Treasury. What remains is loaned out. The coupon bond of point (e) pays a coupon of 4% per year, paid semi-annually. It has 2 years to maturity. If the current Yield-to-Maturity is 3.5% semi-annually, what is the price of the bond?Corso Inc. wants to raise $10 million by issuing 15-year zero coupon bonds with a face value of $1,000. Their investment banker informs them that investors would use a 11.25% discount rate on such bonds. At what price would these bonds sell in the market place assuming semiannual compounding? How many bonds would the firm have to issue to raise $10 million?
- A bank has assets of $500,000,000 and equity of $40,000,000. The assets have an average duration of 5.5 years, and the liabilities have an average duration of 2.5 years. An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years, and the duration of a floating-rate bond that reprices annually is one year. The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000. What is the optimal number of swap contracts into which the bank should enter? 2,500 contracts. 2,760 contracts. 13,800 contracts. 3,200 contracts. None of the above.If the current price of a 10-year 4.5% coupon bond which pays semiannually is $96.10, what is its yield to maturity? If you purchased this bond, held it for three years and the yield to maturity fell to 4.75%, what would its new price be? If you then sold the bond what effective rate of return would you have earned on this three-year investment? Assume there are no taxes to considerAn insurance firm needs to make a payment of $10000 in 3 years, the market interest rate to discount this obligation is 1%. The insurance firm funds this obligation with a 4-year zero-coupon bond and a 2-year coupon bond with a coupon rate of 10% (The coupon payments are made annually). Both bonds have a face value of $1000 and a yield of 1%. What is the price of the 2-year coupon bond? What is the duration of the 2-year coupon bond? What is the portfolio weight on the 2-year coupon bond to immunize the insurance firm’s obligation? How much money should the firm invest in the 2-year coupon bond? Assume one year has passed, the firm needs to rebalance its portfolio to make sure its obligation is still immunized. Assume the market interest rate and the yields do not change. What is the duration of the 2-year coupon bond? What is the portfolio weight on the 2-year coupon bond to immunize the insurance firm’s obligation? How much money should the firm invest in the 2-year coupon bond?
