Question
Your firm has an obligation to pay a parts supplier eight equalannualpayments of $16,000,000 (the first payment is due 1 year from today). Assume the
Your firm has an obligation to pay a parts supplier eight equalannualpayments of $16,000,000 (the first payment is due 1 year from today). Assume the Treasury yield curve is a flat 4.25%, and today your firm purchases zero-coupon Treasury bonds to fund and immunize the obligation.All bonds that your firm purchases have the same maturity.
a. Calculate the present value and duration of the obligation (carry the duration out tofour decimal places).
b. What is the totalface valueof the bonds your firm buys (In your calculations, make sure you use all 4 decimal places in the duration you calculated in part a)
c. If immediately after purchasing the bonds the yield curve increases to a flat 4.63%, by how much (in dollars) will the obligation be underfunded oroverfunded? Be sure to list the dollar amountandto write whether the obligation is underfunded oroverfunded.
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