Question
An insurance company must make payments to a customer of $10 million in 1 year (t=1) and $4 million in year 5 (t=5). The yield
An insurance company must make payments to a customer of $10 million in 1 year (t=1) and $4 million in year 5 (t=5). The yield curve is 10%.
Given the information below answer parts d, e, and f
Part a.
Time | Cash Flow | PV @ 10% | Weight | Duration |
1 | $ 10,000,000.00 | $9,090,909.09 | 0.7854 | 0.7854 |
5 | $ 4,000,000.00 | $2,483,685.29 | 0.2146 | 1.0729 |
Total | $11,574,594.38 | 1 | 1.8583 | |
PV | $11,574,594.38 | |||
Required maturity of zero | 1.8583 |
Part b.
The zero's market value | $11,574,594.38 |
Face value | $13,817,413.73 |
Part c.
Value of the zero | 12857733.14 |
part d: Using the bond that they bought in part (a) along with the info in part (c), how can the company make the payment of $10 million at t=1?
part e: What is the value of the liability (after making the payment in (d)) that remains for the insurance company? Are they still close to being fully funded? Why or Why Not?
part f: Given all the steps you have taken at t=1, what must the insurance company do so that they continue to be immunized. Explain.
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