You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $1.8 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.) Five-year Twenty-year Market Value Five-year Twenty-year million million b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value million million
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are going to closely resemble level perpetuities of $1.8 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. Required: a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.) Five-year Twenty-year Market Value Five-year Twenty-year million million b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.) Face Value million million
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are
going to closely resemble level perpetuities of $1.8 million per year. The interest rate is 10%. You plan to fully fund the obligation using
5-year and 20-year maturity zero-coupon bonds.
Required:
a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round
intermediate calculations. Enter your answers in millions. Round your answers to 1 decimal place.)
Market Value
Five-year
million
Twenty-year
million
b. What must be the face value of each of the two zeros to fund the plan? (Do not round intermediate calculations. Enter your
answers in millions rounded to 2 decimal places.)
Face Value
Five-year
Twenty-year
million
million
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