Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. suppose that a pension fund has to make a payment

Suppose that a pension fund has to make a payment of $1 million in 2 years...

90.2K

Verified Solution

Question

Finance

Suppose that a pension fund has to make a payment of $1 millionin 2 years time. It can hold a one year pure discount bond thatwill pay $1000 in 1 year; or a 3 year bond that will pay a couponof $100 each year, will be redeemed for $1,000 at the end of thethird year. The yield on each bond is 15%. (a) What is the price ofeach bond? (b) What is the duration of each bond. (c) How much ofeach bond should the fund hold to immunize itself against interestrate risk? Explain.

Answer & Explanation Solved by verified expert
4.1 Ratings (710 Votes)
a Yield y 15Price of one year pure discount bond that will pay 1000 in 1year P1 1000 1 y 1000 1 15 86957Price of a n 3 year bond that will pay a coupon of C 100each year will be redeemed for FV P3 1000 at theend    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

Transcribed Image Text

Suppose that a pension fund has to make a payment of $1 millionin 2 years time. It can hold a one year pure discount bond thatwill pay $1000 in 1 year; or a 3 year bond that will pay a couponof $100 each year, will be redeemed for $1,000 at the end of thethird year. The yield on each bond is 15%. (a) What is the price ofeach bond? (b) What is the duration of each bond. (c) How much ofeach bond should the fund hold to immunize itself against interestrate risk? Explain.

Other questions asked by students

Finance
1.2K views

Last year, Stewart-Stern Inc. reported $11,250 of sales, $4,500 of operating costs other than depreciation, and...

Advance Math
1.2K views

Population Exponential Model: Suppose that the growth rate of the population of city X is proportional to...

Medical Sciences
1.2K views

2. Explain how the directional movement of phosphates from ATP to water can be used to...

Psychology
1.2K views

What does a drowning child in a pond have to do with your career choices?

Physics
1.2K views

A parallel plate capacitor with plate area A and separation d has charge Q A...

Physics
1.2K views

Two conductors a are made of the same material and have the same length Conductor...

Geometry
1.2K views

The graphs of the functions y f2 x and y f3 r are given in...

Geometry
1.2K views

ations and Vectors IONS em 1 12 om 3 om a 818 Fowerschool em S...

Basic Math
1.2K views

If f(x) = 2x - 7x+1, find each of the following.(a) f(0) (b) f(-5) (c)...

Algebra
1.2K views

Scoft Set up a Volley Ball net in his Backyard. One of the poles, which...

Accounting
1.2K views

PROBLEM 2-1sCost Classification ILO1, LO2, LOS, LO7 Several years ago. Wallace Company purchased a small...

Accounting
1.2K views

Could you help me with part C? On December 31, 2023, Wildhorse Company reported...