W-Fixed Income Securities

Topics: Bond, Finance, Yield Pages: 2 (423 words) Published: March 3, 2011
Name: 李耀倫
Student No: 0809853A-B011-2996
Fixed Income Securities 1

7. A pension fund manager knows that the following liabilities must be satisfied: Years from Now Liability (in millions)
|Years From Now |Liability (in millions) | |1 |\$2.0 | |2 |\$3.0 | |3 |\$5.4 | |4 |\$5.8 |

Suppose that the pension fund manager wants to invest a sum of money that will satisfy this liability stream. Assuming that any amount that can be invested today can earn an annual interest rate of 7.6%, how much must be invested today to satisfy this liability stream?

One’s liability:
PV0 = 2,000,000 * [1 / (1 + 7.6%) ^1] = 2,000,000 * 0.9294 = \$ 1,858,736.06

Two’s liability:
PV0 = 3,000,000 * [1 / (1 +7.6%) ^2] = 3,000,000 * 0.8637 = \$ 2,591,174.8

Three’s liability:
PV0 = 5,400,000 * [1/ (1 + 7.6%) ^3] = 5,400,000 * 0.8027 = \$ 4,334,679.04

Four’s liability:
PV0 = 5,800,000 * [1 / (1 + 7.6%) ^4] = 5,800,000 * 0.7460 = \$ 4,326,920.42

Answer: 1,858,736.06 + 2,591,174.8 + 4,326,920.42 + 4,326,920.42 = \$ 13,111,510.32

Name: 李耀倫 Student No: 0809853A-B011-2996 Fixed Income Securities 1

8. Calculate for each of the following bonds the price per \$1,000 of par value assuming semiannual coupon payments and explain the price-yield relationship based on your results.

|Bond |Coupon Rate |Years to Maturity |Required yield | |A...