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

50.1K

Verified Solution

Question

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,

Answer & Explanation Solved by verified expert

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

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member