Cost of asset includes all the cost which incurs for acquiring the machine. Cost includes shipping and installation cost. MACRS stands for modified accelerated cost recovery system. Life of the asset will be classified as per the internal revenue code. Five years MACRS rates, Year 1: 20%, Year 2: 32%, Year 3: 19.20% and Year 4: 11.52%, Year 5: 11.52%, Year 6: 5.76%. XC purchased new machine to replace the old machine. The cost of machine is $500,000 and shipping & installation cost is $75,000. New machine falls under five years MACRS class.

Question

An insurance company has liabilities of £7 million due in 10 years' time and £9 million due in 17 years' time. The assets of the company consist of two zero-coupon bonds, one paying £X million in 7 years' time and the other paying £Y million in 20 years' time. The current interest rate is 6% per annum effective. Find the nominal value of X (i.e. the amount, IN MILLIONS, that bond X pays in 7 year's time) such that the first two conditions for Redington's theory of immunisation are satisfied. Express your answer to THREE DECIMAL PLACES.

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Chapter 10, Problem 4PROB

Summary Introduction

Cost of asset includes all the cost which incurs for acquiring the machine. Cost includes shipping and installation cost.

MACRS stands for modified accelerated cost recovery system. Life of the asset will be classified as per the internal revenue code.

Five years MACRS rates, Year 1: 20%, Year 2: 32%, Year 3: 19.20% and Year 4: 11.52%, Year 5: 11.52%, Year 6: 5.76%.

XC purchased new machine to replace the old machine. The cost of machine is $500,000 and shipping & installation cost is $75,000. New machine falls under five years MACRS class.

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