Can I get assistance on this question please? You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund aregoing to closely resemble level perpetuities of $1.8 million per year. The interest rate is 10%. You plan to fully fund the obligation using5-year and 20-year maturity zero-coupon bonds.Required:a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not roundintermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.)Market ValueFive-yearmillionTwenty-yearmillionb. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter youranswers in millions rounded to 2 decimal places.)Face ValueFive-yearTwenty-yearmillionmillion

Bonds are used to finance projects and operations by corporations, cities, states, and sovereign…

Answered: You manage a pension fund that will…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 22P

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You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $1.4 million per year. The interest rate is 8%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $2.1 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.) Market Value Five year: Twenty year: b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value Five year: Twenty year:
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $1.8 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds.Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.) Market Value Five-Year ___ Million Twenty-Five Year ___ Million b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value Five-Year ___ Million Twenty-Five Year ___ Million
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are essentially going to resemble level perpetuities of $2.24 million per year. The yield to maturity on all bonds is 14%. (a). Assume the duration of six-year maturity bonds with coupon rates of 10% (paid annually) is 5 years, and the duration of 22-year maturity bonds with coupon rates of 7% (paid annually) is 11 years. Calculate how much of each of these two coupon bonds (in market value) you will want to hold in order to both fully fund and immunize your obligation. (b). Calculate the total par value of your holdings in the six-year maturity coupon bond. Please show working
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 million per year to beneficiaries. the yield to maturity on all bonds is 15%. a. if the duration of 5-year maturity bonds with coupon rates of 11% (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?
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 million per year to beneficiaries. The yield to maturity on all bonds is 16%.a. If the duration of 5-year maturity bonds with coupon rates of 12% (paid annually) is four 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?b. What will be the par value of your holdings in the 20-year coupon bond?
As a pension fund manager, you anticipate that you have to pay out 8 percent on $100 million for the next eight years. The payment is made semi-annually. You currently hold $100 million of floating-rate note that pays LIBOR + 2.5 percent. What is your potential risk? To eliminate or reduce your risk, you arrange a swap with a dealer who agree to pay you 6 percent fixed, while you pay him LIBOR. The swap payment is made semi-annually as well. Determine your cash flow as a percent of notional amount at each payment date under this arrangement and assess if you have sufficient cash flow to pension fund holder
A pension fund faces a promised outflow of $5 million in 6 years. Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation. a. What must be the proportions ((W7, W6) or (Weight(A), Weight(B)) of the two bonds in this 2-security portfolio to immunize it against changes in interest rates? b. What is the yield to maturity for the immunized portfolio? c. How much needs to be invested in each bond to build an immunized portfolio with an expected value of $5 million in 6 years? d. Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?
You manage a pension fund that will provide retired workers with lifetime annuities. You expect a large number of workers to retire in 8 years. You have the following two bonds to invest in and immunize this portfolio. Inputs Bond A Bond B Settlement date 01-01-2020 01-01-2020 Maturity date 01-01-2025 01-01-2040 Coupon rate 0.025 0.0000 Face Value $1,000.00 $1,000.00 Coupons per year 1 1 Obligation Time to Payout 8 Payout $50,000,000 Initial Yield to Maturity 0.0750 Required: Using any necessary data above, calculate the Present value and Macaulay Duration of the obligation. Assume annual payments. Then calculate the Macaulay Duration and the Modified Duration for each bond. Use this information to immunize the portfolio. Then, re-immunize the portfolio 1 year later using the new yield.
A pension fund faces a promised outflow of $5 million in 6 years. Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation. d. Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?
You have $5,000 to invest for the next year and are considering three alternatives:a. A money market fund with an average maturity of 30 days offering a current yield of 6% per year.b. A 1-year savings deposit at a bank offering an interest rate of 7.5%.c. A 20-year U.S. Treasury bond offering a yield to maturity of 9% per year.What role does your forecast of future interest rates play in your decisions?
A portfolio for a pension fund that you manage has payments resembling a perpetuity. You want to immunize the pension fund liability by purchasing 2 bonds: a zero coupon bond maturing in 6 years & a 10% coupon bond with a duration of 25 years. Assume the yield on both bonds & the pension fund is 7%. What percent of your portfolio should you invest in the zero-coupon bonds?

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