MA373 F15 Homework Chapter 9

# MA373 F15 Homework Chapter 9 - Chapter 9 Section 1 1 John...

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October 30, 2015 Copyright Jeff Beckley 2013, 2014, 2015 Chapter 9, Section 1 1. John must pay Kristen 10,000 at the end of 1 year. He also must pay Ahmad 30,000 at the end of year 2. John wants to exactly match his liabilities by purchasing the following two bonds: a. Bond A is a one year zero coupon bond maturing for 1000. b. Bond B is a two year bond with annual coupons of 200 and a maturity value of 1000. Calculate the amount of each bond that John should buy. 2. Yvonne must make a payment of 80,000 at the end of one year. Additionally, she must make a payment of 40,000 at the end of two years. Finally, she must make a payment of 60,000 at the end of 3 years. She wants to purchase bonds to exactly match her payments. She can purchase the following three bonds: Bond Number Term of Bond Annual Coupon Maturity Value 1 1 Year 0 1000 2 2 Years 60 1000 3 3 Years 70 1200 Calculate the amount of Bond 2 which Yvonne should purchase. 3. Rivera Insurance Company has committed to paying 10,000 at the end of one year and 40,000 at the end of two years. It’s Chief Financial Officer, Miguel, wants to exactly match this obligation using the following two bonds: Bond A is a one year bond which matures at par of 1000 and pays an annual dividend at a rate of 6%. This bond can be bought to yield 6% annually. Bond B is a two year bond which matures at par of 1000 and pays an annual dividend at a rate of 10%. This bond can be bought to yield 7% annually. Calculate the amount of each bond that Rivera should purchase. Calculate the cost of Rivera to exactly match this obligation.

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October 30, 2015 Copyright Jeff Beckley 2013, 2014, 2015 4. Wang Life Insurance Company issues a three year annuity that pays 40,000 at the end of each year. Wang uses the following three bonds to absolutely match the cash flows under this annuity:
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