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(Solved): An Insurance Company Must Make Payments To A Customer Of $10 Million In 5 Years And $25 Million In 3...
An insurance company must make payments to a customer of $10 million in 5 years and $25 million in 30 years. The yield curve is flat at 8%. a) What is the present value and duration of its obligation? b) 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? Suppose you buy a zero-coupon bond with value and duration equal to your obligation, and that rates immediately increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?
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Please see the table below. Please be guided by the second rowto understand the mathematics.Figures in parenthesis, if any, mean negative values. All financials are in $ million. Liabilities Term