LNP is a company with a liability of $110 million,which is due in 10 years. The company’s lone asset is $70 million held in cash. The only assumption is that term structure of interest rates remains flat at 5%. (a) Determine the present value of the company’s liability. (b) Without any calculations,briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.
LNP is a company with a liability of $110 million,which is due in 10 years. The company’s lone asset is $70 million held in cash. The only assumption is that term structure of interest rates remains flat at 5%.
(a) Determine the present value of the company’s liability.
(b) Without any calculations,briefly explain why holding all its assets in cash is problematic for LNP from an interest rate risk management perspective.
Two bonds, A and B, are currently trading. Bond A is a 3-year coupon bond with a face value of $100, selling for $113.616; coupons are paid annually. Bond B is a perpetuity with an initial cash flow of $1 in one year’s time, with
(c) Caluclate Bond A’s coupon rate and the pricing of Bond B.
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