Chapter 7 of corporate finance 7
D2 fr A B D E F G H K L 3 4 a. Value of liability today: 5 6 b, c. Coupon payment: 7 8 Original YTM YTM decrease YTM increase 9 Reinvestment YTM: Coupon rate: 10 11 Value of reinvested coupons at Year 5 Value of reinvested coupons at Year 5 Value of reinvested coupons at Year 5 Coupon payment 12 Year 1 13 14 Six-month period 1 2 3 4 5 15 2 16 17 3 18 6 7 19 4 20 8 21 5 9 10 22 23 24 Section 7.2 Eutura value of counane: Section 7.5 Section 7.7 Yield Curve Data Master it! Solution + AutoSave om A 2,,S = n,,, a C nu FCF 11e MAR IEA ML File Home Insert Draw Page Layout Formulas Data Review View Developer Help Share Comments F28 fx 8% A B D E G . One way to eliminate reinvestment risk is called immunization. Rather than buying bonds with the same maturity as the liability, the company instead buys bonds with the same duration as the liability. If you think about the dedicated portfolio, if the interest rate falls, the future value of the reinvested coupon payments decreases. However, as interest rates fall, the price of the bond increases. These effects offset each other in an immunized portfolio. 17 18 Another advantage of using duration to immunize a portfolio is that the duration of a portfolio is simply the weighted average of the duration of the assets in the portfolio. In other words, to find the duration of a portfolio, you simply take the weight of each asset multiplied by its duration and then sum the results. 19 20 21 d. What is the duration of the liability for Ice Cubes, Inc.? 22 e Suppose the two bonds shown below are the only bonds available to immunize the liability. What face amount of each bond will the company need to purchase to immunize the portfolio? 23 24 25 26 27 28 29 30 Settlement: Maturity: Coupon rate: YTM: Coupons per year: Bond A 1/1/2000 1/1/2003 7.00% 7.50% 2 Bond B 1/1/2000 1/1/2008 8.00% 9.00% 2 31 32 33 34 35 36 Question 1 Face value ... Section 7.1 Section 7.2 Section 7.5 Section 7.7 Yield Curve Data Master it! Solution Ready la 100% 1 a 71F Sunny 3:54 PM 10/26/2021 5 D2 fr A B D E F G H K L 3 4 a. Value of liability today: 5 6 b, c. Coupon payment: 7 8 Original YTM YTM decrease YTM increase 9 Reinvestment YTM: Coupon rate: 10 11 Value of reinvested coupons at Year 5 Value of reinvested coupons at Year 5 Value of reinvested coupons at Year 5 Coupon payment 12 Year 1 13 14 Six-month period 1 2 3 4 5 15 2 16 17 3 18 6 7 19 4 20 8 21 5 9 10 22 23 24 Section 7.2 Eutura value of counane: Section 7.5 Section 7.7 Yield Curve Data Master it! Solution + AutoSave om A 2,,S = n,,, a C nu FCF 11e MAR IEA ML File Home Insert Draw Page Layout Formulas Data Review View Developer Help Share Comments F28 fx 8% A B D E G . One way to eliminate reinvestment risk is called immunization. Rather than buying bonds with the same maturity as the liability, the company instead buys bonds with the same duration as the liability. If you think about the dedicated portfolio, if the interest rate falls, the future value of the reinvested coupon payments decreases. However, as interest rates fall, the price of the bond increases. These effects offset each other in an immunized portfolio. 17 18 Another advantage of using duration to immunize a portfolio is that the duration of a portfolio is simply the weighted average of the duration of the assets in the portfolio. In other words, to find the duration of a portfolio, you simply take the weight of each asset multiplied by its duration and then sum the results. 19 20 21 d. What is the duration of the liability for Ice Cubes, Inc.? 22 e Suppose the two bonds shown below are the only bonds available to immunize the liability. What face amount of each bond will the company need to purchase to immunize the portfolio? 23 24 25 26 27 28 29 30 Settlement: Maturity: Coupon rate: YTM: Coupons per year: Bond A 1/1/2000 1/1/2003 7.00% 7.50% 2 Bond B 1/1/2000 1/1/2008 8.00% 9.00% 2 31 32 33 34 35 36 Question 1 Face value ... Section 7.1 Section 7.2 Section 7.5 Section 7.7 Yield Curve Data Master it! Solution Ready la 100% 1 a 71F Sunny 3:54 PM 10/26/2021 5
