An insurance company has invested in the following fixed income securities (a) $10,000,000 of five year Treasury notes paying 5 percent interest and selling at par value, (b) $5,800,000 of 10 year bonds paying 7 percent interest with a par value of $6,000,000, and (c) $6,200,000 of 20 year subordin...

a M A 5x10m 10x58m 20x62m22m 23222 1055 years b To determine the weightedaverage maturity of the por ...

An insurance company has invested in the following fixed-income securities: (a) $10,000,000 of five-year Treasury notes paying

Question:

An insurance company has invested in the following fixed-income securities: (a) $10,000,000 of five-year Treasury notes paying 5 percent interest and selling at (b) $5,800,000 of 10-year bonds paying 7 percent interest with a of $6,000,000, and (c) $6,200,000 of 20-year subordinated paying 9 percent interest with a of $6,000,000.

a. What is the weighted-average of this of assets?

b. If interest rates change so that the yields on all of the securities decrease 1 percent, how does the weighted-average of the change?

c. Explain the changes in the values if the yields increase by 1 percent.

d. Assume that the insurance company has no other assets. What will be the effect on the market value of the company’s equity if the interest rate changes in (b) and (c) occur?

Debentures
Debenture DefinitionDebentures are corporate loan instruments secured against the promise by the issuer to pay interest and principal. The holder of the debenture is promised to be paid a periodic interest and principal at the term. Companies who... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...