(A) Adequate information: The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%. To calculate: The proportion of each bond that must be held to immunize and fully fund the obligation Introduction: Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

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Answer 1

Question

Chapter 16, Problem 13PS

Summary Introduction

(A)

Adequate information:

The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%.

To calculate:

The proportion of each bond that must be held to immunize and fully fund the obligation

Introduction:

Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

Summary Introduction

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

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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 $2 million per year to beneficiaries. The yield to maturity on all bonds is 16%.a. If the duration of 5-year maturity bonds with coupon rates of 12% (paid annually) is four years and the duration of 20-year maturity bonds with coupon rates of 6% (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?b. What will be the par value of your holdings in the 20-year coupon bond?

Pension funds pay lifetime annuities to recipients. If a firm remains 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 $3.0 million per year to beneficiaries. The yield to maturity on all bonds is 20%. Required: a. If the duration of 5-year maturity bonds with coupon rates of 16% (paid annually) is 3.7 years and the duration of 20-year maturity bonds with coupon rates of 7% (paid annually) is 6.5 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 5 decimal places.) > Answer is complete but not entirely correct. Holdings 5-year bond 20-year bond $ 1.60000 million $ 22.20000 million b. What will be the par value of your holdings in the 20-year coupon bond? (Enter your answer in dollars not in…

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 $2 million per year to beneficiaries. The yield to maturity on all bonds is 16%. Required: a. If the duration of 5-year-maturity bonds with coupon rates of 12% (paid annually) is four years and the duration of 20- year-maturity bonds with coupon rates of 6% (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? Note: Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place. b. What will be the par value of your holdings in the 20-year coupon bond? Note: Do not round intermediate calculations. Enter your answer in millions rounded to 2 decimal places. a. 5 year bond a. 20 year bond b. Par value $…

Answer 2

Question

Chapter 16, Problem 13PS

Summary Introduction

(A)

Adequate information:

The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%.

To calculate:

The proportion of each bond that must be held to immunize and fully fund the obligation

Introduction:

Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

Summary Introduction

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

Expert Solution & Answer

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Check out a sample textbook solution

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Answer 3

Question

Chapter 16, Problem 13PS

Summary Introduction

(A)

Adequate information:

The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%.

To calculate:

The proportion of each bond that must be held to immunize and fully fund the obligation

Introduction:

Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

Summary Introduction

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

Expert Solution & Answer

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See solution

Answer 4

Question

Chapter 16, Problem 13PS

Summary Introduction

(A)

Adequate information:

The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%.

To calculate:

The proportion of each bond that must be held to immunize and fully fund the obligation

Introduction:

Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

Summary Introduction

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

Expert Solution & Answer

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Answer 5

Chapter 16, Problem 13PS

Summary Introduction

(A)

Adequate information:

The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%.

To calculate:

The proportion of each bond that must be held to immunize and fully fund the obligation

Introduction:

Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

Summary Introduction

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

Answer 6

Chapter 16, Problem 13PS

Summary Introduction

(A)

Adequate information:

The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%.

To calculate:

The proportion of each bond that must be held to immunize and fully fund the obligation

Introduction:

Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

Answer 7

Chapter 16, Problem 13PS

Summary Introduction

(A)

Adequate information:

The coupon rate for the 5 year maturity bond is 12% and the duration is 4 years. Since, the duration pertaining to 20 year maturity bond has been 8 years and the coupon rate is 6%.

To calculate:

The proportion of each bond that must be held to immunize and fully fund the obligation

Introduction:

Bond refers to the debt instrument pertaining to which loan is provided by the investor to the governmental or corporate entity for a definite time period at a fixed or variable rate of interest.

Answer 8

Summary Introduction

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

Answer 9

Summary Introduction

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

Answer 10

Expert Solution & Answer

Answer 11

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Answer 12

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Answer 13

Ch. 16 - Prob. 1PS Ch. 16 - Prob. 2PS Ch. 16 - Prob. 3PS Ch. 16 - Prob. 4PS Ch. 16 - Prob. 5PS Ch. 16 - Prob. 6PS Ch. 16 - Prob. 7PS Ch. 16 - Prob. 8PS Ch. 16 - Prob. 9PS Ch. 16 - Prob. 10PS

Solution Summary: The author calculates the proportion of each bond that must be held to immunize and fully fund the obligation.

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(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

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Chapter 16 Solutions

Solution Summary: The author calculates the proportion of each bond that must be held to immunize and fully fund the obligation.

Concept explainers

Videos

(B) To calculate: The par value of the 20 year coupon bond Introduction: Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.

Want to see the full answer?

Chapter 16 Solutions

(B)

To calculate:

The par value of the 20 year coupon bond

Introduction:

Par value refers to the bond's face value. It is important for a fixed income instrument or bond because it helps in identifying the value at the time of maturity and coupon payments in dollar value.