Question
An insurance company has liabilities to pay $50m, at the end of each year for the next 40 years. In order to meet these liabilities,
An insurance company has liabilities to pay $50m, at the end of each year for the next 40 years. In order to meet these liabilities, the insurance company can invest in zero coupon bonds with terms to redemption of 5 years (Bond1) and 40 years (Bond2). The current effective annual interest rate is 0.04. a) The duration of the liabilities is ______________. You need to determine the face amount of each bond that the fund needs to hold so that the first two conditions for immunization are met. b) The face amount of Bond1 need to be _______. c) Using your calculations, the revised present value of the liabilities if there were a reduction in interest rates by 0.02 per annum affective is ___________. d) The present value of the liabilities at a rate of interest of 0.02 is _________
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