A pension provider expects future liabilities of £8.5 million payable at the end of each of the years 7, 9, 11 and 13. (i) (ii) (!!!) Using an effective rate of interest of 5% per annum, calculate the present value and the effective duration of the company's liabilities. The company invests an amount equal to the present value of the liabilities in two zero-coupon bonds that mature in exactly 6 years and 15 years from now. Calculate the respective prices of these two assets such that the first two conditions of Redington's theory of immunisation hold. Without doing any further calculations, briefly explain whether or not the company is immunised against small changes in the rate of interest. (iv) Calculate the profit/loss achieved by the company if the effective rate of interest increases immediately to 5.5% per annum.
A pension provider expects future liabilities of £8.5 million payable at the end of each of the years 7, 9, 11 and 13. (i) (ii) (!!!) Using an effective rate of interest of 5% per annum, calculate the present value and the effective duration of the company's liabilities. The company invests an amount equal to the present value of the liabilities in two zero-coupon bonds that mature in exactly 6 years and 15 years from now. Calculate the respective prices of these two assets such that the first two conditions of Redington's theory of immunisation hold. Without doing any further calculations, briefly explain whether or not the company is immunised against small changes in the rate of interest. (iv) Calculate the profit/loss achieved by the company if the effective rate of interest increases immediately to 5.5% per annum.
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
Related questions
Question
Solve it using formulas, no tables
corect answers:
i) V(L)(5%)= 20.997 ---> V(A)(5%)= 9.2921
ii) P(x) = £12.23288 and P(y) = £8.76459
iv) P(5.5%) = 20.05089 - 20.04757 = 0.00332
Transcribed Image Text:A pension provider expects future liabilities of £8.5 million payable at the end of each of the
years 7, 9, 11 and 13.
(i)
(ii)
(!!!)
Using an effective rate of interest of 5% per annum, calculate the present value and
the effective duration of the company's liabilities.
The company invests an amount equal to the present value of the liabilities in two
zero-coupon bonds that mature in exactly 6 years and 15 years from now.
Calculate the respective prices of these two assets such that the first two conditions
of Redington's theory of immunisation hold.
Without doing any further calculations, briefly explain whether or not the company is
immunised against small changes in the rate of interest.
(iv) Calculate the profit/loss achieved by the company if the effective rate of interest
increases immediately to 5.5% per annum.
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