Question
Year Benefits ($MM) 2020 $10.60 2021 $11.24 2022 $11.91 2023 $12.62 Total $46.37 Using an assumed interest rate of 6%, the present value of this
Year Benefits ($MM)
2020 $10.60
2021 $11.24
2022 $11.91
2023 $12.62
Total $46.37
Using an assumed interest rate of 6%, the present value of this stream of fixed cash outflows is $40 million. You are given $40 million to invest in U.S. Treasury bonds for the pension plan. Your boss insists that you only invest in 1 year and 10 year STRIPS. Your task is to minimize the exposure of the Edison Mills pension fund to unexpected changes in the level of interest rates. Your performance will be evaluated after one year. Assume term structure is flat at 6%.
(a) What is duration of your obligation?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Financial Management For Public Health And Not-for-Profit Organizations
Authors: Steven A. Finkler, Daniel L. Smith, Thad D. Calabrese, Robert M. Purtell
7th Edition
1071835335, 978-1071835333
