Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $3.0 million per year to beneficiaries. The yield to maturity on all bonds is 20%. Required: a. If the duration of 5-year maturity bonds with coupon rates of 16% (paid annually) is 3.7 years and the duration of 20-year maturity bonds with coupon rates of 7% (paid annually) is 6.5 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation? (Do not round intermediate calculations. Enter your answers in millions rounded to 5 decimal places.) × Answer is complete but not entirely correct. Holdings 5-year bond 20-year bond $ 1.60000 $ 22.20000 million million b. What will be the par value of your holdings in the 20-year coupon bond? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Answer is complete but not entirely correct. Par value $ 41 x

Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $3.0 million per year to beneficiaries. The yield to maturity on all bonds is 20%. Required: a. If the duration of 5-year maturity bonds with coupon rates of 16% (paid annually) is 3.7 years and the duration of 20-year maturity bonds with coupon rates of 7% (paid annually) is 6.5 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation? (Do not round intermediate calculations. Enter your answers in millions rounded to 5 decimal places.) × Answer is complete but not entirely correct. Holdings 5-year bond 20-year bond $ 1.60000 $ 22.20000 million million b. What will be the par value of your holdings in the 20-year coupon bond? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Answer is complete but not entirely correct. Par value $ 41 x

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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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a
perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $3.0 million per
year to beneficiaries. The yield to maturity on all bonds is 20%.
Required:
a. If the duration of 5-year maturity bonds with coupon rates of 16% (paid annually) is 3.7 years and the duration of 20-year maturity
bonds with coupon rates of 7% (paid annually) is 6.5 years, how much of each of these coupon bonds (in market value) will you want to
hold to both fully fund and immunize your obligation? (Do not round intermediate calculations. Enter your answers in millions
rounded to 5 decimal places.)
> Answer is complete but not entirely correct.
Holdings
5-year bond
20-year bond
$
1.60000 million
$ 22.20000 million
b. What will be the par value of your holdings in the 20-year coupon bond? (Enter your answer in dollars not in millions. Do not
round intermediate calculations. Round your answer to the nearest dollar amount.)
> Answer is complete but not entirely correct.
Par value
$
41 x

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Step 1: Duration and Immunization

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Step 2: Calculation of duration and PV of obligations of the pension fund:

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Step 3: Calculation of weight of each bond:

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Step 4: Investment in each bond

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Step 5: Calculation of par value of 20-year coupon bonds

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