You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund aregoing to closely resemble level perpetuities of $2.3 million per year. The interest rate is 10%. You plan to fully fund the obligation using5-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?.Five-yearTwenty-yearMarket ValueFive-yearTwenty-yearmillionmillionb. What must be the face value of each of the two zeros to fund the plan?Face Valuemillionmillion

Bonds payable is a type of instrument where by an amount is borrowed for a fixed period with fixed…

Answered: You manage a pension fund that will…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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1) What is the loanable funds market? 2) Calculate the following: You save $100 and want to see how much you will earn based on the following interest rates Interest Rate Value after 1 month -1% ? 0.5% ? 1% ? 2% ? 3) What supply factors affect the Loanable Funds market? 4) What demand factors affect the Loanable Funds market?
You have a choice between receiving $550 now or $570 in six months' time. Current interest rates are 10% p.a. (simple interest). a) As a rational investor, which option would you choose, and why? b) Calculate the minimum interest rate p.a. that would reverse your choice above.
My pension plan will pay me $10,500 once a year for a 10-year period. The first payment will come in exactly five years. The pension fund wants to immunize its position. Required: a. What is the duration of its obligation to me? The current interest rate is 5.0% per year. b. If the plan uses 5-year and 20-year zero-coupon bonds to construct the immunized position, how much money ought to be placed in each bond? c. What will be the face value of the holdings in each zero? Complete this question by entering your answers in the tabs below. Required A Required B Required C What is the duration of its obligation to me? The current interest rate is 5% per year. Note: Do not round intermediate calculations. Round your answer to 2 decimal places. Duration years
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