Say you are an insurance company manager who issued a zero-coupon bond that promises to pay...

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Finance

Say you are an insurance company manager who issued azero-coupon bond that promises to pay $13,400.96 six years fromtoday. The present value (PV) of the obligation today is$10,000.
(2) What is the YTM of this obligation?
(8) You wish to fund the obligation using the following 2bonds:
Bond A:
   Maturity: 13 years
Coupon rate: 5.29% (Annually)
Price:   $1200
Bond B:
Maturity: 2 years
Coupon rate: 0.5% (Annually)
Price: $800

Find the optimal weights for animmunization strategy (A portfolio that is not exposed to interestrate risk). How many bonds A and bonds B should you buy? (Noneed to show me how the income grows over the years)

Answer & Explanation Solved by verified expert

4.2 Ratings (818 Votes)

Part aYTM of the obligation FV PV1 n 1 1340096 1000016 1 500Part bAs a first step we need to find the modified duration of each ofthe two bonds and the liabilityModified duration of the liability Duration 1 YTM 6 1 5 See Answer

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Say you are an insurance company manager who issued azero-coupon bond that promises to pay $13,400.96 six years fromtoday. The present value (PV) of the obligation today is$10,000.(2) What is the YTM of this obligation?(8) You wish to fund the obligation using the following 2bonds:Bond A: Maturity: 13 yearsCoupon rate: 5.29% (Annually)Price: $1200Bond B:Maturity: 2 yearsCoupon rate: 0.5% (Annually)Price: $800 Find the optimal weights for animmunization strategy (A portfolio that is not exposed to interestrate risk). How many bonds A and bonds B should you buy? (Noneed to show me how the income grows over the years)