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
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
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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Transcribed Image Text: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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