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 $3.5 million per year to beneficiaries. The yield to maturity on all bonds is 17.5%. a. If the duration of 5-year maturity bonds with coupon rates of 14.8% (paid annually) is four years and the duration of 20-year maturity bonds with coupon rates of 8% (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? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.) 5-year bond 20-year bond million million b. What will be the par value of your holdings in the 20-year coupon bond? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
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 $3.5 million per year to beneficiaries. The yield to maturity on all bonds is 17.5%. a. If the duration of 5-year maturity bonds with coupon rates of 14.8% (paid annually) is four years and the duration of 20-year maturity bonds with coupon rates of 8% (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? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.) 5-year bond 20-year bond million million b. What will be the par value of your holdings in the 20-year coupon bond? (Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places.)
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 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 $3.5 million per
year to beneficiaries. The yield to maturity on all bonds is 17.5%.
a. If the duration of 5-year maturity bonds with coupon rates of 14.8% (paid annually) is four years and the duration of 20-year maturity
bonds with coupon rates of 8% (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? (Do not round intermediate calculations. Enter your answers in millions
rounded to 1 decimal place.)
5-year bond
20-year bond
million
million
b. What will be the par value of your holdings in the 20-year coupon bond? (Do not round intermediate calculations. Enter your
answer in millions rounded to 2 decimal places.)
Par value
million
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