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13.9 sam style An insurance company has liabilities of 10 million due in 10 years'...

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Accounting

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13.9 sam style An insurance company has liabilities of 10 million due in 10 years' time and 20 million due in 15 years' time. The company's assets consist of two zero-coupon bonds. One pays 7.404 million in 2 years' time and the other pays 31.834 million in 25 years' time. The current interest rate is 7% per annum effective. (1) Show that Redington's first two conditions for immunisation against small changes in the rate of interest are satisfied for this insurance company. [6] (ii) Calculate the present value of profit that the insurance company will make if the interest rate increases immediately to 7.5% per annum effective. [2] Explain, without any further calculation, why the insurance company made a profit as a result of the change in the interest rate. [2] [Total 10)

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