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Harry is the owner of a small grocery store and he has only one employee, Dick. Dick is going to retire after 4 years and
Harry is the owner of a small grocery store and he has only one employee, Dick. Dick is going to retire after 4 years and Harry promises to pay Dick $7,000 once a year for a 5 -year period, the first payment starting 5 years from now. Assume that Dick will be alive for at least 10 more years, that the yield curve is flat and that the prevailing interest rate is 4% effective. (a) Calculate the present value, Macaulay duration and convexity of the retirement benefit entitled to Dick. (b) Harry wants to use a $100 par value 5-year coupon bond with annual coupon rate of 4% and a $100 par value 10-year bond with annual coupon rate of 5% to construct an immunized portfolio. Find the face value of each of the two bonds. Harry is the owner of a small grocery store and he has only one employee, Dick. Dick is going to retire after 4 years and Harry promises to pay Dick $7,000 once a year for a 5 -year period, the first payment starting 5 years from now. Assume that Dick will be alive for at least 10 more years, that the yield curve is flat and that the prevailing interest rate is 4% effective. (a) Calculate the present value, Macaulay duration and convexity of the retirement benefit entitled to Dick. (b) Harry wants to use a $100 par value 5-year coupon bond with annual coupon rate of 4% and a $100 par value 10-year bond with annual coupon rate of 5% to construct an immunized portfolio. Find the face value of each of the two bonds
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