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A court has ordered Security Enterprises to pay 200000 in two years and 500000 in five...

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Finance

A court has ordered Security Enterprises to pay 200000 in twoyears and 500000 in five years. In order to meet this importantliability, they wish to invest in a combination of two-year 10%par-value bonds with annual coupons and five-year zero-couponbonds. Each of these is sold to yield an annual effective yield of4%. how much of each type of bond should be purchased so that thepresent value and duration conditions of Redington immunization aresatisfied at the current 4% rate? what is the face value of the 2year bond purchased? 5 year bond? Answers: 2 year= $179,736.12, FV=$161,463.94 5 year= $416,138.68,

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4.2 Ratings (595 Votes)
Liability 200000 in two years and 500000 in five years Discount rate current yield y 4 PV and duration of liabilities time t Liability L PV of L L 1 yt L 1 4t PV x t 2 20000000 18491124 36982249 5 50000000 41096355 205481777 Total 70000000 59587480 242464025 Hence PV of liabilities 59587480 and duration of liabilities 242464025 59587480 40690 years Let A and B be the number of 2 year coupon bond and 5 year zero coupon bond    See Answer
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Transcribed Image Text

A court has ordered Security Enterprises to pay 200000 in twoyears and 500000 in five years. In order to meet this importantliability, they wish to invest in a combination of two-year 10%par-value bonds with annual coupons and five-year zero-couponbonds. Each of these is sold to yield an annual effective yield of4%. how much of each type of bond should be purchased so that thepresent value and duration conditions of Redington immunization aresatisfied at the current 4% rate? what is the face value of the 2year bond purchased? 5 year bond? Answers: 2 year= $179,736.12, FV=$161,463.94 5 year= $416,138.68,

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