Question
An insurance company issued a $108 million one-year, zero-coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year)
An insurance company issued a $108 million one-year, zero-coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year) and used the proceeds plus $28 million in equity to fund a $136 million face value, two-year commercial loan at 6 percent annual interest. Immediately after these transactions were (simultaneously) undertaken, all interest rates went up 1.5 percent.
a. | What is the market value of the insurance companys loan investment after the changes in interest rates? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. (e.g., 32.16)) |
Market value of the loan investment | $ million |
b. | What is the duration of the loan investment when it was first issued? (Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161)) |
Duration of the loan investment | years |
c. | Using duration, what is the new expected value of the loan if interest rates are predicted to increase to 7.5 percent from the initial 6 percent? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. (e.g., 32.16)) |
New expected value | $ million |
d. | What is the market value of the insurance companys $108 million liability when interest rates rise by 1.5 percent? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places. (e.g., 32.161)) |
Market value of the liability | $ million |
e. | What is the duration of the insurance companys liability when it is first issued? |
Duration of the liability | year(s) |
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