Duration – Insurance Co

Duration – Insurance Co - Duration...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Duration – Insurance Co. Example 1 We’ll use insurance companies to illustrate interest rate risk. Policy calls for the payment of a lump sum at the policyholder’s retirement. The value of the account must be sufficient the make the payment. Suppose it is 2010; the payment of $1,469 is due in five years in 2015.
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 What options are there? Buy a 5-year Maturity (Zero) Bond Buy a 5-year Duration Coupon Bond Duration – Insurance Co. Example
Background image of page 2
3 Option 1 - Buy a 5-year Maturity (Zero) Bond Remember that a discount bond pays no interest. The firm could buy a 5-year bond, as follows: $1,000 / (1 + .08)5 = $680.58 Since they will need $1,469 (not $1,000), they will need to buy 1.469 bonds (for each $1,000 in coverage). Duration – Insurance Co. Example
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Option 2 - Buy a 5- year Duration Coupon Bond The bond we looked at earlier has a duration of 4.993 years, or about 5-years. The FI Manager could
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.

Page1 / 7

Duration – Insurance Co - Duration...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online