Question

A company has liabilities of $1800 and $2150 due at the end of years 1 and...

A company has liabilities of $1800 and $2150 due at the end of years 1 and 2 respectively. The only investments available are 1-year 5% annual coupon bonds and 2-year 6% annual coupon bonds and both redeemable at par. How much of each bond (in terms of maturity values) should the company buy in order to exactly (absolutely) match the assets and liabilities.

Business   Accounting   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Ans:

Ans:

Liability after 1 year : $1,800

Investment in 1 year bond @ : 5%

Investment to be done today @5% to earn $1,800 after 1 year.

= Amount required * present value factor

Present value factor: 1/(1.05)^1 = 0.95238

Value of asset company should buy : 1,800*0.95238

= $1,714.29

Liability after 2 year: $2,150

Investment in 1 year bond @ : 6%

Investment to be done today @6% to earn $2,150 after 2 year.

= Amount required * present value factor

Present value factor: 1/(1.06)^2 = 0.8900

Value of asset company should buy : 2,150*0.8900

= $1,913.50

So investment should be done in 1 year bond : 1714.29 and $ 1913.50 in 2 years bond.

Total investment : $1714.29+$1913.50 = $3627.79

For any query please ask in comment box. Thanks!

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A company has liabilities of $1,000 due in 6 months and $1,000 due in one year....
A company has liabilities of $1,000 due in 6 months and $1,000 due in one year. The assets available are: Bond A: A one-year $1,000 par bond with 4% coupons paid semiannually, with an annual effective yield of 6% Bond B: A 6 month $1,000 par bond with 6% coupon paid semiannually, with an annual effective yield of 8% What is the total purchase price of the portions of each bond that must be bought to exactly match the liabilities?...
A company must pay liabilities of 5000 in 6 months and 7000 in one year. The only investments available to the company are
A company must pay liabilities of 5000 in 6 months and 7000 in one year. The only investments available to the company are(a) A 6 month bond with face amount 1,000 and a nominal 5% annual coupon rate convertible semiannually, and a 4% nominal annual yield rate convertible semiannually(b) A one-year bond with face amount 1000, a 6% nominal annual coupon rate convertible semiannually, and a 7% nominal annual yield rate convertible semiannually.Find the amount of each bond to purchase...
Joe must pay liabilities of 1,000 due one year from now and another 2,000 due three...
Joe must pay liabilities of 1,000 due one year from now and another 2,000 due three years from now. There are two available investments: Bond I: A one-year zero-coupon bond that matures for 1,000. The yield rate is 6% per year Bond II: A two-year zero-coupon bond with face amount of 1,000. The yield rate is 7% per year. At the present time the one-year forward rate for an investment made two years from now is 6.5%. Joe plans to...
1. AAA, Inc. currently has an issue of bonds outstanding that will mature in 31 years....
1. AAA, Inc. currently has an issue of bonds outstanding that will mature in 31 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 20.0% with annual coupon payments. The bond is currently selling for $890. The bonds may be called in 4 years for 120.0% of the par value ($1200). What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity? 2. BBB, Inc....
. A small insurance company has liabilities of $5 million in 10 years’ time and $6...
. A small insurance company has liabilities of $5 million in 10 years’ time and $6 million in 11 years’ time. The current interest rate is 5.21% per annum effective. The investment manager plans to buy one 5-year zero coupon bond of maturity value $A million and one 15-year zero coupon bond of maturity value $B million. Find the values of A and B that immunize this portfolio.
The following liabilities are due in the next four years: Due Date Amount May 1st 2019...
The following liabilities are due in the next four years: Due Date Amount May 1st 2019 $3,710,000 May 1st 2020 $6,620,000 May 1st 2021 $4,410,000 May 1st 2022 $5,250,000 The following US Treasuy Bonds have been selected to pay the obligations. Interest is paid annually on April 30th of each year. Assume we are purchasing in April 2018. Maturity Date Coupon Rate April 30th, 2019 2.75% April 30th, 2020 3.50% April 30th, 2021 4.75% April 30th, 2022 5.50% How much...
1. Omega Enterprises has an 8% coupon bond with exactly 16 years to maturity. Interest is...
1. Omega Enterprises has an 8% coupon bond with exactly 16 years to maturity. Interest is paid semi-annually. The bond is priced at $1,125 per $1,000 of face value. a.) What is the yield to maturity on this bond? b.)An investor purchased the bond at $1,125 and sold it 5 years later at a price of $1,023. What was the investor’s return. (Hint: calculate the YTM as in a) above but use the sale price as the future value. 2....
Your company currently has $1000 ​par, 5.25 % coupon bonds with 10 years to maturity and...
Your company currently has $1000 ​par, 5.25 % coupon bonds with 10 years to maturity and a price of $ 1080. If you want to issue new​ 10-year coupon bonds at​ par, what coupon rate do you need to​ set? Assume that for both​ bonds, the next coupon payment is due in exactly six months.
Your company currently has $1,000 ​par, 6.5% coupon bonds with 10 years to maturity and a...
Your company currently has $1,000 ​par, 6.5% coupon bonds with 10 years to maturity and a price of $1,082. If you want to issue new​ 10-year coupon bonds at​ par, what coupon rate do you need to​ set? Assume that for both​ bonds, the next coupon payment is due in exactly six months.
Your company currently has $ 1000 ​par, 6.5 % coupon bonds with 10 years to maturity...
Your company currently has $ 1000 ​par, 6.5 % coupon bonds with 10 years to maturity and a price of $ 1,080. If you want to issue new​ 10-year coupon bonds at​ par, what coupon rate do you need to​ set? Assume that for both​ bonds, the next coupon payment is due in exactly six months. You need to set a coupon rate of _____%
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT