Present Value (PV) of Liabilities Assignment | Homework For You
June 9th, 2020
You manage an insurance fund, and your liabilities consist of two time payments for the policy holders as follows:
• 10 years $20 million
You currently invest in $18 million bond assets to offset the liabilities. The interest rate term structure is currently flat at 5%.
(a) Calculate the present value (PV) of your liabilities. (2 marks)
(b) Calculate modified duration (Dmod) of your liabilities. (2 marks)
(c) Calculate an approximate change in the present value of your liabilities, using duration, when interest rates fall by 0.25% (2 marks)
(d) In order to balance the risk on the liabilities, the manager invests the $18 million into 2 assets : al-year Treasury bills (ie, 1-year zero-coupon bond) and a Treasury bond with modified duration of 20. How would the manager allocate the purchase assets to avoid interest rate risk of your portfolio, which includes both assets and liabilities?
(Hint: value of the Asset portfolio and Liability portfolio should be equal. SValue = P. Dmed) (4 marks)Get Finance homework help today