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1. An insurance company has issued $850,000,000 in short-term notes with a 4-year maturity to finance the purchase of $850,000,000 short-term investments with a 1-year
1. An insurance company has issued $850,000,000 in short-term notes with a 4-year maturity to finance the purchase of $850,000,000 short-term investments with a 1-year maturity. The insurance company must pay 6.5% annual interest on the notes but earns 7.9% annual interest on the investments. a. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 1. (5 points) b. Calculate the insurance company's profit spread and dollar value of profit at the end of Year 2 if the bank must make short-term investments that earn 7.1% annual interest. (5 points) c. What type of interest rate risk is the insurance company facing due to the different maturities on its assets and liabilities? Why is this a concern to the insurance company? ( 3 points)
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