Fixed income hw2

# Fixed income hw2 - Siming Zhu AEM 4260_Fixed Income...

This preview shows pages 1–2. Sign up to view the full content.

Siming Zhu AEM 4260_Fixed Income September 16, 2008 Homework 2 Ch 2 – Q 2 & 9; Ch 3 – Q 12 Q2. Suppose that a life insurance company has guaranteed a payment of \$14 million to a pension fund 4.5 years from now. If the life insurance company receives a premium of \$10.4 million from the pension fund and can invest the entire premium for 4.5 years at an annual interest rate of 6.25%, will it have sufficient funds from this investment to meet the \$14 million obligation? Using an annual interest rate of 6.25% , the \$10.4 million invested by the life insurance company for 4.5 years will grow to be: FV t=4.5 = \$10.4 million(1+.0625) 4.5 FV t=4.5 = \$10.4 million(1.31365) FV t=4.5 = \$13.662 million. Using an annual interest rate of 6.25%, the \$10.4 million will grow to approximately \$13.662 million in 4.5 years, which is not enough to meet the \$14 million obligation. Using a semi-annual interest rate of 3.125% (6.25/2), the 10.4 million invested by the life insurance company for nine 6-months periods will grow to be: FV t=9 = \$10.4 million (1+.03125) 9 FV t=9 = \$10.4 million (1.31909) FV t=9 = \$13.719 million \$10.4 million compounding semi-annually at 3.125% will grow to approximately \$13.719 million in nine 6-months periods (4.5 years), which is still not enough to meet the \$14 million obligation. Q9.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 3

Fixed income hw2 - Siming Zhu AEM 4260_Fixed Income...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online