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%. Required: 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-y maturity bonds with coupon rates of 8% (paid annually) is 11 years, how much of each of these coupon bonds (in marke value) will you want to hold to both fully fund and immunize your obligation? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. b. What will be the par value of your holdings in the 20-year coupon bond? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. a 5 year bond million
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%. Required: 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-y maturity bonds with coupon rates of 8% (paid annually) is 11 years, how much of each of these coupon bonds (in marke value) will you want to hold to both fully fund and immunize your obligation? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. b. What will be the par value of your holdings in the 20-year coupon bond? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. a 5 year bond million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Nikul
![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%.
Required:
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 rates of 8% (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?
Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.
b. What will be the par value of your holdings in the 20-year coupon bond?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
a. 5 year bond
a. 20 year bond
b. Par value
million
million
million](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F56f7dba4-fa2f-468a-8fcd-d3bb15286fee%2F17a15399-72fb-4cc7-844e-b36b31b00732%2Fhtywovo_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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%.
Required:
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 rates of 8% (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?
Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.
b. What will be the par value of your holdings in the 20-year coupon bond?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
a. 5 year bond
a. 20 year bond
b. Par value
million
million
million
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