2009-Quiz 5 - Fin 3144, Spring 2009 Quiz 5 Show your work...

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Fin 3144, Spring 2009 Name: _____KEY _________________ Quiz 5 Show your work to receive any credit! 1. A pension fund expects that it will have to pay out $25 million one year from today, $15 million two years from today and $50 million 5 years from today. a. What is the duration of its liability if the appropriate (annualized) yield to use for discounting is 4%? 008 . 160 , 003 , 79 ) 04 . 1 ( 000 , 000 , 50 ) 04 . 1 ( 000 , 000 , 15 04 . 1 000 , 000 , 25 5 2 0 = + + = P years D 256 . 3 008 . 160 , 003 , 79 5 * ) 04 . 1 ( 000 , 000 , 50 2 * ) 04 . 1 ( 000 , 000 , 50 1 * 04 . 1 000 , 000 , 25 5 2 = + + = b. If the yield decreases by 20 basis points (.2%), according to your answer in part (a), what will be the approximate change in the present value (price) of the liability? % 626 . 0 256 . 3 * 04 . 0 1 002 . 0 * / 1
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This note was uploaded on 09/22/2010 for the course FIN 3055 at Virginia Tech.

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2009-Quiz 5 - Fin 3144, Spring 2009 Quiz 5 Show your work...

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