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Homework answers / question archive / A company has to pay £2,000(10-) at the end of yeart, for t=5,6,7,8,9
A company has to pay £2,000(10-) at the end of yeart, for t=5,6,7,8,9. It values these liabilities assuming that there will be a constant effective annual rate of interest of 6% pa. a Exam style (0) Calculate the present value of the company's liabilities. [3] The company wants to immunise its exposure to the liabilities by investing in two bonds: Bond A pays coupons of 5% pa annually in arrears and is redeemable at par in 15 years' time Bond B is a zero-coupon bond that is redeemable at par in 5 years' time. The gross redemption yield on both stocks is the same as the interest rate used to value the liabilities. (ii) (a) Determine the amount that the company should invest in each of the two bonds to ensure that the present value and discounted mean term of the assets are equal to those of the liabilities. (b) State the third condition required for immunisation. [9] [Total 12]
