Answered step by step
Verified Expert Solution
Question
1 Approved Answer
You are the manager of a pension fund, BU Rocks Pension Plan (BRPP). BRPP's financial situation is: Assets = 10 million Duration of assets
You are the manager of a pension fund, BU Rocks Pension Plan (BRPP). BRPP's financial situation is: Assets = 10 million Duration of assets = 15 years Liabilities = 8 million Duration of the liabilities = 15 years Assume the current yield is 7% for both assets and liabilities. Answer the following questions (all duration in this question refers to Macaulay Duration): a) Comment on the following statement: "BRPP's equity holders are pro- tected from interest rate fluctuations because the duration of asset is equal to the duration of liabilities." Is the statement true or false and why? A quantitative analysis is expected. (10 points) b) You look at the asset side of BRPP and find that out of the 10 million assets, 2 million of them are cash. You want to pay out 1 million cash to equity holders. After the cash pay out, what is the duration gap of BRPP?
Step by Step Solution
★★★★★
3.42 Rating (149 Votes )
There are 3 Steps involved in it
Step: 1
a The statement is false The duration of assets is not equal to the duration of liabilities The dura...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