Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble aperpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $1.8 million peryear to beneficiaries. The yield to maturity on all bonds is 11.0%.Required:a. If the duration of 5-year-maturity bonds with coupon rates of 8.5% (paid annually) is four years and the duration of 20-year-maturitybonds with coupon rates of 4% (paid annually) is 11 years, how much of each of these coupon bonds (in market value) will you wantto 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 bonda. 20 year bondb. Par valuemillionmillionmillion

Perpetual payments of $1.8million per year.Yield to maturity is 11%For part aCoupon rate is 8.5…

Answered: a. 5 year bond a. 20 year bond b. Par…

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a. 5 year bond a. 20 year bond b. Par value million million 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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Question

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 $1.8 million per
year to beneficiaries. The yield to maturity on all bonds is 11.0%.
Required:
a. If the duration of 5-year-maturity bonds with coupon rates of 8.5% (paid annually) is four years and the duration of 20-year-maturity
bonds with coupon rates of 4% (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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