Question

You manage a pension fund that promises to pay out $10 million to its contributors in...

You manage a pension fund that promises to pay out $10 million to its contributors in five years. You buy $7472582 worth of par-value bonds that make annual coupon payments of 6% and mature in five years. Right after you make the purchase, the interest rate on same-risk bonds decreases to 5.2%. If the rate does not change again and you reinvest the coupon payments that you receive in same-risk bonds, how much will you fall short of the money that you promised? Write your answer as a positive number and round it to the nearest dollar.

Homework Answers

Answer #1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

At the end of 5 years, the par value of the bonds will be recovered, i.e. $7,472,582.

To determine the future value of annual coupon payments received, we will use the FV of ordinary annuity's formula:

Here, P = 6% of $7,472,582 = $448,354.92

r = Interest rate = 5.20%

n = 5 years

FV of annuity = $448,354.92 * [ {(1+5.20%)^5-1}/5.20% ] = $2,487,361.65

Shortfall at end of 5 years = $10,000,000 - $7,472,582 - $2,487,361.65 = $40,056.8 ~ 40057

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
As a pension fund manager in 2020, you are given $67,556,416.88 to manage so that the...
As a pension fund manager in 2020, you are given $67,556,416.88 to manage so that the fund will have at least $100,000,000 available in 2030, 10 years from now. The yield curve is flat, and the current interest rate for all maturities is 4%. The only bonds that you can buy are annual coupon Treasury bonds with 1-year maturities and bonds issued in 2020 that mature in 2040 (currently a maturity of 20 years). All bonds are issued at par....
You run a pension fund and the bonds in which you've invested will mature after you...
You run a pension fund and the bonds in which you've invested will mature after you will need to pay out the money. If interest rates _____, the bonds will fall in price and you'll have to sell them cheap. This is known as _____ risk. Select one: rise; price rise; reinvest rise; credit rise; liquidity fall; price fall; reinvestment fall; credit fall; liquidity
You manage a pension fund that has a target duration of 10 years, you must immunize...
You manage a pension fund that has a target duration of 10 years, you must immunize your portfolio using two bonds. The first bond is a 6-year zero-coupon bond and the second bond is a perpetuity. Both securities have a 10% yield to maturity. What percentage of your assets will you invest in the zero-coupon bond?
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that...
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are essentially going to resemble level perpetuities of $600.000 per year. The interest rate is 8%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that...
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are essentially going to resemble level perpetuities of $600.000 per year. The interest rate is 8%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position?
a pension fund anticipates needing to pay out $2.5 million dollars in benefits in 2027 (seven...
a pension fund anticipates needing to pay out $2.5 million dollars in benefits in 2027 (seven years from today). assume the yield curve is a flat 5%. it has two options for bonds in which to invest: a zero coupon treasury bond with a time to maturity of 10 years and a YTM of 3%, and a zero coupon bond Johnson&Johnson bond with 3 years to maturity and a 6% YTM. they want zero interest rate risk. how much should...
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that...
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are essentially going to resemble level perpetuities of $1.1 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations....
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that...
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are essentially going to resemble level perpetuities of $1.4 million per year. The interest rate is 4%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations....
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that...
You manage a pension fund that will provide retired workers with lifetime annuities. You determine that the payouts of the fund are essentially going to resemble level perpetuities of $0.8 million per year. The interest rate is 10%. You plan to fully fund the obligation using 5-year and 20-year maturity zero-coupon bonds. a. How much market value of each of the zeros will be necessary to fund the plan if you desire an immunized position? (Do not round intermediate calculations....
A pension fund anticipates needing to pay out $2.5 million dollars in benefits in 2027 (seven...
A pension fund anticipates needing to pay out $2.5 million dollars in benefits in 2027 (seven years from today). Assume the yield curve is a flat 5%.  It has two options for bonds in which to invest: a zero coupon Treasury bond with a time to maturity of 10 years and YTM of 3%, and a zero coupon Johnson & Johnson bond with 3 years to maturity and a 6% YTM. They want zero interest rate risk. How much money should...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT