Question

The Honorable East India Company must pay two liabilities, 100, 000 in exactly three years (t = 3) and 120,000 in exactly five years (t = 5). The current interest rate is 8% effective per year. The company wants to immunize itself from any potential change in interest rates, no matter how large, as the amount of silver and gold introduced to Europe by Spanish conquistadors is causing the rates to deviate frantically.

The company will attempt to achieve this by setting three zero-coupon bonds as assets associated with their liabilities, the bonds maturing at times 2, 4 and 6.

(a) (5 points) What form of immunization are they seeking to form: Redington Immunization or Full Immunization? Briefly explain.

(b) (5 points) Calculate the Macaulay duration and convexity for the liabilities, considered as a single portfolio of liabilities.

(c) (10 points) Is it possible for the company to achieve the form of immunization they would like to have? If it is, find the redemption amounts (A2 (at time 2),A4 (at time 4),A6 (at time 6)) for the three and zero-coupon bonds and justify that they immunize the liabilities. If it is not, explain it is not possible to fully immunize.

Answer #1

Providence Health Care is obligated to make a payment of
$300,000 in exactly three years. In order to provide for this
obligation, their financial officer decides to purchae a
combination of one-year zero-coupon bonds and four-year zero-coupon
bonds. Each of these is sold to yield an annual effective yield of
4%. How much of each type of bond should be purchased so that the
present value and duration conditions of Redington immunization are
satisfied? Is the convexity condition also satisfied...

Please read the article and answear about
questions.
Determining the Value of the Business
After you have completed a thorough and exacting investigation,
you need to analyze all the infor- mation you have gathered. This
is the time to consult with your business, financial, and legal
advis- ers to arrive at an estimate of the value of the business.
Outside advisers are impartial and are more likely to see the bad
things about the business than are you. You should...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 6 minutes ago

asked 14 minutes ago

asked 14 minutes ago

asked 17 minutes ago

asked 27 minutes ago

asked 36 minutes ago

asked 43 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago