An insurance firm needs to make a payment of $10000 in 3 years, the market interest rate to discount this obligation is 1%. The insurance firm funds this obligation with a 4-year zero-coupon bond and a 2-year coupon bond with a coupon rate of 10% (The coupon payments are made annually). Both bonds have a face value of $1000 and a yield of 1%. What is the price of the 2-year coupon bond? What is the duration of the 2-year coupon bond? What is the portfolio weight on the 2-year coupon bond to immunize the insurance firm’s obligation?

An insurance firm needs to make a payment of $10000 in 3 years, the market interest rate to discount this obligation is 1%. The insurance firm funds this obligation with a 4-year zero-coupon bond and a 2-year coupon bond with a coupon rate of 10% (The coupon payments are made annually). Both bonds have a face value of $1000 and a yield of 1%. What is the price of the 2-year coupon bond? What is the duration of the 2-year coupon bond? What is the portfolio weight on the 2-year coupon bond to immunize the insurance firm’s obligation?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 9P

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