An investment company has future liabilities of £8 million due in 5 years' time and £15 million due in 10 years' time and assets consisting of 3 zero-coupon bonds, one paying £6.3 million in 2 years' time, another paying £9.7 million in 7 years' time and another paying £9.8332 million in 25 years' time. Assuming that the current interest rate is 6% per annum effective: (a) Show that Redington's first two conditions for immunization against small changes in the rate of interest are satisfied for this company. (b) Determine the profit or loss, expressed as a present value, which the insurance company will make if the interest rate decreases immediately to 5.5% per annum effective. (c) Explain briefly why you would have anticipated whether a profit or loss would be made in (b) without even carrying out the calculations.

An investment company has future liabilities of £8 million due in 5 years' time and £15 million due in 10 years' time and assets consisting of 3 zero-coupon bonds, one paying £6.3 million in 2 years' time, another paying £9.7 million in 7 years' time and another paying £9.8332 million in 25 years' time. Assuming that the current interest rate is 6% per annum effective: (a) Show that Redington's first two conditions for immunization against small changes in the rate of interest are satisfied for this company. (b) Determine the profit or loss, expressed as a present value, which the insurance company will make if the interest rate decreases immediately to 5.5% per annum effective. (c) Explain briefly why you would have anticipated whether a profit or loss would be made in (b) without even carrying out the calculations.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 4P

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