Where does the 2.6019 in the solution some from???? Explanation of SolutionThe computation of the proportion of portfolio must be allocated towards the perpetuities and zero couponbonds are shown below:Duration of perpetuity = ()= ()= I1 yearsLet the zero coupon bond's weight is w. therefore computation of the weight is shown below:(w x 1) + |(1 – w) x II] = 2.60198.3981= 0.8398Perpetuity = (1 – 8398)= 0.1620ConclusionThus, it can be concluded that 16.02% of the portfolio should be invested in perpetuity and rest 83.89% inthe zero coupon bond. 10. A pension plan is obligated to make disbursements of $1 million, $2 million, and $1 million at the end of each of the nextthree years, respectively. Find the duration of the plan's obligations if the interest rate is 10% annually. (@ LO 11-2)11. If the plan in the previous problem wants to fully fund and immunize its position, how much of its portfolio should itallocate to one-year zero-coupon bonds and perpetuities, respectively, if these are the only two assets funding the plan? (O LO 11-4)

Perpetuity:- A perpetuity is a type of investment which yields forever. In the financial world,…

Explanation of Solution The computation of the proportion of portfolio must be allocated towards the perpetuities and zero coupon bonds are shown below: Duration of perpetuity =) = (8) = 11 years Let the zero coupon bond's weight is w. therefore computation of the weight is shown below: (wx 1) + (1-w) x 11] = 2.6019 w = (8.31) = 0.8398 Perpetuity = (1-8398) = 0.1620 Conclusion Thus, it can be concluded that 16.02% of the portfolio should be invested in perpetuity and rest 83.89% in the zero coupon bond.

Explanation of Solution The computation of the proportion of portfolio must be allocated towards the perpetuities and zero coupon bonds are shown below: Duration of perpetuity =) = (8) = 11 years Let the zero coupon bond's weight is w. therefore computation of the weight is shown below: (wx 1) + (1-w) x 11] = 2.6019 w = (8.31) = 0.8398 Perpetuity = (1-8398) = 0.1620 Conclusion Thus, it can be concluded that 16.02% of the portfolio should be invested in perpetuity and rest 83.89% in the zero coupon bond.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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