Your insurance company is considering different strategies. Among the options that are being con- sidered are various ten-year par value bonds each with 8% annual effective yield rate and annual coupons. The bonds have varying face values and varying coupon rates. You are tasked with an- alyzing the effects of face value and coupon rate changes on Macaulay duration of these bonds, in order to choose an investment strategy that immunizes your company’s position. Show your work and explanations in determining whether Macaulay duration increases, decrease, or stays constant in each of the following separate situations, (a) when face value increases. (b) when coupon rate increases.

Your insurance company is considering different strategies. Among the options that are being con- sidered are various ten-year par value bonds each with 8% annual effective yield rate and annual coupons. The bonds have varying face values and varying coupon rates. You are tasked with an- alyzing the effects of face value and coupon rate changes on Macaulay duration of these bonds, in order to choose an investment strategy that immunizes your company’s position. Show your work and explanations in determining whether Macaulay duration increases, decrease, or stays constant in each of the following separate situations, (a) when face value increases. (b) when coupon rate increases.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 5MC

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