MA373 F11 Chapter 9 Homework

# MA373 F11 Chapter 9 Homework - Chapter 9 Homework Section...

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November 2, 2011 Chapter 9 Homework Section 9.1 1. 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. 2. Clay has agreed to pay David 2500 at the end of one year and 5000 at the end of two years. Clay wants to fund those future liabilities by purchasing assets now so that an absolute match occurs. Clay can buy: a. Bond I which is a one year bond with an annual coupon rate of 5%; and b. Bond II which is a two year bond with an annual coupon rate of 6%. Both bonds are redeemable at par which is 1000. Calculate the amount of each bond that should be purchased to exactly match the liabilities. 3. Problem 1 from Section 9.1 of the Book. 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: a. A zero coupon bond which matures in one year for 1000. b.

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MA373 F11 Chapter 9 Homework - Chapter 9 Homework Section...

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