Problem 22-10 (LG 22-3) An insurance company issued a $99 million one-year, zero-coupon note at 7 percent...

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Finance

Problem 22-10 (LG 22-3)
An insurance company issued a $99 million one-year, zero-couponnote at 7 percent add-on annual interest (paying one coupon at theend of the year) and used the proceeds plus $19 million in equityto fund a $118 million face value, two-year commercial loan at 9percent annual interest. Immediately after these transactions were(simultaneously) undertaken, all interest rates went up 1.4percent.
a.
What is the market value of the insurance company’s loaninvestment after the changes in interest rates? (Do notround intermediate calculations. Enter your answer in millionsrounded to 3 decimal places. (e.g., 32.16))
  Market value of the loan investment $  million
b.
What is the duration of the loan investment when it was firstissued? (Do not round intermediate calculations. Round youranswer to 3 decimal places. (e.g., 32.161))
  Duration of the loan investment years
c.
Using duration, what is the new expected value of the loan ifinterest rates are predicted to increase to 10.4 percent from theinitial 9 percent? (Do not round intermediate calculations.Enter your answer in millions rounded to 3 decimal places. (e.g.,32.16))
  New expected value $  million
d.
What is the market value of the insurance company’s $99 millionliability when interest rates rise by 1.4 percent? (Do notround intermediate calculations. Enter your answer in millionsrounded to 3 decimal places. (e.g., 32.161))
  Market value of the liability $  million
e.
What is the duration of the insurance company’s liability whenit is first issued?
  Duration of the liability year(s)

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Problem 22-10 (LG 22-3)An insurance company issued a $99 million one-year, zero-couponnote at 7 percent add-on annual interest (paying one coupon at theend of the year) and used the proceeds plus $19 million in equityto fund a $118 million face value, two-year commercial loan at 9percent annual interest. Immediately after these transactions were(simultaneously) undertaken, all interest rates went up 1.4percent.a.What is the market value of the insurance company’s loaninvestment after the changes in interest rates? (Do notround intermediate calculations. Enter your answer in millionsrounded to 3 decimal places. (e.g., 32.16)) Market value of the loan investment$ million b.What is the duration of the loan investment when it was firstissued? (Do not round intermediate calculations. Round youranswer to 3 decimal places. (e.g., 32.161)) Duration of the loan investmentyears c.Using duration, what is the new expected value of the loan ifinterest rates are predicted to increase to 10.4 percent from theinitial 9 percent? (Do not round intermediate calculations.Enter your answer in millions rounded to 3 decimal places. (e.g.,32.16)) New expected value$ million d.What is the market value of the insurance company’s $99 millionliability when interest rates rise by 1.4 percent? (Do notround intermediate calculations. Enter your answer in millionsrounded to 3 decimal places. (e.g., 32.161)) Market value of the liability$ million e.What is the duration of the insurance company’s liability whenit is first issued? Duration of the liabilityyear(s)