Question 7 (of 8 Show correct answer 7Award: 10 out of 10.00 points Pension fund

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Question 7 (of 8 Show correct answer 7Award: 10 out of 10.00 points Pension funds pay lifetime annuties to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a perpetuity Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $2.0 milion per year to beneficianles. The yield to maturity on all bonds is 16% a. It the duration of 5 year maturity bonds with coupon rates of 12% paid annually) is 4 0 years and the duration of 20 year maturity bonds with coupon rates of 6% (paid annually) ts 7.9 years, how much of each of these coupon bonds (in market value) will you want to hold to both funy fund and immunize your obligation? (Do not round intermediate calculations. Enter your answers in millions rounded to 1 decimal place.) 5-year bond 20- year bond S2.1 million $10.4 million b. What will be the par value of your holdings in the 20-year coupon bond? (Enter your answer in dollars not in millions. Do not round intermediate calculations. Round your answer to the nearest dollar amount.) Par value S 25,586,489 eBook & Resources 955A search

Explanation / Answer

The price of the 20­ year bond is:

[60 * Annuity factor(16%, 20)] + [1,000 × PV factor (16%, 20)] = $407.11

Therefore, the bond sells for 0.40711 times its par value, so that:

Market value = Par value * 0.40711

$10.4166667 million = Par value * 0.40711

Par value = $25.586860 million

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