An insurance company has liabilities of £4 million due in 7 years' time and £13 million due in 11 years' time. The company has assets consisting of two zero-coupon bonds, one paying £6.9617 million in 4 years' time and the other paying £11.4007 million in 18 years' time. The current interest rate is 6% p.a. effective. Demonstrate that Redington's first two conditions for immunisation against small changes in the rate of interest are satisfied for this insurance company.

An insurance company has liabilities of £4 million due in 7 years' time and £13 million due in 11 years' time. The company has assets consisting of two zero-coupon bonds, one paying £6.9617 million in 4 years' time and the other paying £11.4007 million in 18 years' time. The current interest rate is 6% p.a. effective. Demonstrate that Redington's first two conditions for immunisation against small changes in the rate of interest are satisfied for this insurance company.

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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