Question

An insurance company must make payments to a customer of $8 million in one year and $4 million in four years. The yield curve is flat at 9%. a. If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase?

Answer 1

1.8356 years

Step-by-step explanation:

The computation of the purchase of maturity bond is shown below:

Years (A) Payment PVF at 9% PV Weight (B) Duration (A × B)

1 $8,000,000 0.9174 $7,339,449.54 0.7215 0.7215

4 $4,000,000 0.7084 $2,833,700.84 0.2785 1.1142

$101,731,503.39 1 1.8356