An insurance company issued a $90 million one-year, zero- coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year) and used the proceeds plus $10 million in equity to fund a $100 million face value, two-year commercial loan at 10 percent annual interest. Immediately after these transactions were (simultaneously) undertaken, all interest rates went up 1.5 percent. (LG 22-3)   1- What is the market value of the insurance company’s loan investment after the changes in interest rates?   2- What is the duration of the loan investment when it was first issued?   3- Using duration, what is the expected change in the value of the loan if interest rates are predicted to increase to 11.5 percent from the initial 10 percent?

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
icon
Related questions
icon
Concept explainers
Question

An insurance company issued a $90 million one-year, zero- coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year) and used the proceeds plus $10 million in equity to fund a $100 million face value, two-year commercial loan at 10 percent annual interest. Immediately after these transactions were (simultaneously) undertaken, all interest rates went up 1.5 percent. (LG 22-3)

 

1- What is the market value of the insurance company’s loan investment after the changes in interest rates?

 

2- What is the duration of the loan investment when it was first issued?

 

3- Using duration, what is the expected change in the value of the loan if interest rates are predicted to increase to 11.5 percent from the initial 10 percent?

 

4- What is the market value of the insurance company’s $90 million liability when interest rates rise by 1.5 percent?

 

5- What is the duration of the insurance company’s liability when it is first issued?

 

Use excel for solving

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps with 6 images

Blurred answer
Knowledge Booster
Characteristics of Bonds
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education