An investment company has future liabilities of £8 million due in 5 years' time and £15 million due in 10 years' time and assets consisting of 3 zero-coupon bonds, one paying £6.3 million in 2 years' time, another paying £9.7 million in 7 years' time and another paying £9.8332 million in 25 years' time. Assuming that the current interest rate is 6% per annum effective: (a) Show that Redington's first two conditions for immunization against small changes in the rate of interest are satisfied for this company. (b) Determine the profit or loss, expressed as a present value, which the insurance company will make if the interest rate decreases immediately to 5.5% per annum effective. (c) Explain briefly why you would have anticipated whether a profit or loss would be made in (b) without even carrying out the calculations.
An investment company has future liabilities of £8 million due in 5 years' time and £15 million due in 10 years' time and assets consisting of 3 zero-coupon bonds, one paying £6.3 million in 2 years' time, another paying £9.7 million in 7 years' time and another paying £9.8332 million in 25 years' time. Assuming that the current interest rate is 6% per annum effective: (a) Show that Redington's first two conditions for immunization against small changes in the rate of interest are satisfied for this company. (b) Determine the profit or loss, expressed as a present value, which the insurance company will make if the interest rate decreases immediately to 5.5% per annum effective. (c) Explain briefly why you would have anticipated whether a profit or loss would be made in (b) without even carrying out the calculations.
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
calculate using formulas, no tables:
correct answers:
a) PVa(6%)=14.349 is not = to PV’l(6%)= 113.649 and PV’a(6%)=14.349 is not = to PVl(6%)= 113.649
b) P(5.5%)= 0.004450
Transcribed Image Text:An investment company has future liabilities of £8 million due in 5 years' time and
£15 million due in 10 years' time and assets consisting of 3 zero-coupon bonds, one
paying £6.3 million in 2 years' time, another paying £9.7 million in 7 years' time and
another paying £9.8332 million in 25 years' time. Assuming that the current interest
rate is 6% per annum effective:
(a) Show that Redington's first two conditions for immunization against small
changes in the rate of interest are satisfied for this company.
(b) Determine the profit or loss, expressed as a present value, which the insurance
company will make if the interest rate decreases immediately to 5.5% per annum
effective.
(c) Explain briefly why you would have anticipated whether a profit or loss would be
made in (b) without even carrying out the calculations.
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