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13.9 sam style An insurance company has liabilities of 10 million due in 10 years' time and 20 million due in 15 years' time. The
13.9 sam style An insurance company has liabilities of 10 million due in 10 years' time and 20 million due in 15 years' time. The company's assets consist of two zero-coupon bonds. One pays 7.404 million in 2 years' time and the other pays 31.834 million in 25 years' time. The current interest rate is 7% per annum effective. (1) Show that Redington's first two conditions for immunisation against small changes in the rate of interest are satisfied for this insurance company. [6] (ii) Calculate the present value of profit that the insurance company will make if the interest rate increases immediately to 7.5% per annum effective. [2] Explain, without any further calculation, why the insurance company made a profit as a result of the change in the interest rate. [2] [Total 10)
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