Pension funds pay lifetime annuities to recipients. If a firm will remain 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 $1.9 million per year to beneficiaries. The yield to maturity on all bonds is 19.0%. Required: a. If the duration of 5-year-maturity bonds with coupon rates of 11.8% (paid annually) is four years and the duration of 20-year-maturity bonds with coupon rates of 7% (paid annually) is 11 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? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. b. What will be the par value of your holdings in the 20-year coupon bond? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. a. 5 year bond a. 20 year bond b. Par value million million million

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
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Pension funds pay lifetime annuities to recipients. If a firm will remain 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 $1.9 million per
year to beneficiaries. The yield to maturity on all bonds is 19.0%.
Required:
a. If the duration of 5-year-maturity bonds with coupon rates of 11.8% (paid annually) is four years and the duration of 20-year-maturity
bonds with coupon rates of 7% (paid annually) is 11 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?
Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.
b. What will be the par value of your holdings in the 20-year coupon bond?
Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.
a. 5 year bond
a. 20 year bond
b. Par value
million
million
million
Transcribed Image Text:Pension funds pay lifetime annuities to recipients. If a firm will remain 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 $1.9 million per year to beneficiaries. The yield to maturity on all bonds is 19.0%. Required: a. If the duration of 5-year-maturity bonds with coupon rates of 11.8% (paid annually) is four years and the duration of 20-year-maturity bonds with coupon rates of 7% (paid annually) is 11 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? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. b. What will be the par value of your holdings in the 20-year coupon bond? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. a. 5 year bond a. 20 year bond b. Par value million million million
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