1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
uysha [10]
2 years ago
10

An insurance company must pay liabilities of 99 at the end of one year, 102 at the end of two years and 100 at the end of three

years. The only investments available to the company are the following three bonds. Bond A and Bond C are annual coupon bonds. Bond B is a zero-coupon bond.
Bond Maturity (in years) Yeild to Maturity(Annualized) Coupon Rate
A 1 6% 7%
B 2 7% 0%
C 3 9% 5%

All three bonds have a par value of 100 and will be redeemed at par. Calculate the number of units of Bond A that must be purchased to match the liabilities exactly

a. 0.8807
b. 0.8901
c. 0.8975
d. 0.9524
e. 0.9724
Business
1 answer:
ale4655 [162]2 years ago
8 0

Answer:

The correct answer is option (a) 0.8807

Explanation:

Solution

Given that:

We start from the liability of bond in 3 years.

Thus, the $100 liability can be an  offset by Bond C.

The cash flow of  Bond C and the payment of final coupon in year 3 is given as:  

100 + (5%*100) = 105

Now,

the number of Bond C which will offset a liability of $100 which is = 100/105 = 0.9524 (All cash flows of Bond C is multiplied by this)

So, the remaining liability becomes

Time Liabilities cash flow Cash flow from Bond C  Remaining liabilities

1             99                             4.76                                 94.24

2            102                             4.76                                 97.24

3            100                            100.00

Thus,

The year 2 liability offset is $97.24

For Bond B, this can be the offset which contains a cash flow of $100 (which is a zero coupon bond)

The Bond number  which are required for this offset is = 97.24/100 =0.974

The remaining  cash flow is computed as follows:

Time = 1 ,2, 3

Liabilities cash flow = 99, 102, 100

Cash flow from Bond C =4.76, 4.76. 100.00

Remaining liabilities = 94.24, 97.24

Cash flow from Bond B = 0, 97.24

Remaining liabilities = 97.24

What this suggest is that The Bond A has to offset at approximately $94.24 in year 1.

The Cash flow from Bond A = 100 + (7%*100) = 107

Hence,

The  number of Bond A's needed = 94.24/107 = 0.8807

You might be interested in
What is a type of tort?
fomenos

Answer:

There are 3 main types of tort; intentional tort, negligence tort and strict liability

Explanation:

By definition, a  tort is a civil offense against another person. The victim who suffers in that offense can sue for damages, get represented by a lawyer  and receive a compensation. There are 3 main types of tort; intentional tort, negligence tort and strict liability. Tort laws are followed when making a decision whether to hold a person legally responsible for the breach against another, and the type of compensation the injured party receives.An intentional tort for example is a civil offense committed when a person engages in intentional conduct that results in damages to another.

4 0
3 years ago
Pompeii, Inc., has sales of $50,000, costs of $23,000, depreciation expense of $2,250, and interest expense of $2,000. If the ta
Zielflug [23.3K]

Answer:

operating cash flow = $21307.5

Explanation:

given data

sales = $50,000

costs = $23,000

depreciation expense = $2,250

interest expense = $2,000

tax rate = 23 percent

solution

we get here operating cash flow for that

EBIT  = Sales - Costs - Depreciation   .............1

EBIT  = $50,000 - $23,000 - $2,250

EBIT   = $24750

and taxes is

taxes = tax rate × EBIT    ..........2

taxes = 0.23 × $24750

taxes = $5692.5

so here operating cash flow that is

operating cash flow = EBIT + Depreciation - Taxes   ..........3

operating cash flow = $24750 + $2,250 - $5692.5

operating cash flow = $21307.5

6 0
3 years ago
In an output contract, the seller can operate a factory on a 24-hour-a-day schedule and can legally require that the buyer take
Len [333]

Answer:

yes

Explanation:

5 0
3 years ago
you are billed $300 at 5% simple interest for 2 years but given an opportunity to pay only 3% compound interest for 2 years. Whi
balandron [24]
This question is a bit tricky to answer because it does not state how often interest rate is applied so lets say for the simple 5% interest rate the rate of interest was calculated after 2 years you would pay a total interest of $15 since interest was only calculated once but for the 3% calculating every year with compound it would be a total of 18.27 dollars in interest but then you would have to calculate the 5% simple interest the same way which would total to $30 if calculated once a year being more than the 3% compound. But lets say interest is calculated once a month your total for the 5% simple interest would be $360 dollars interest for those 2 years and the 3% compound would be $406.97 dollars in interest. So over all the less amount of times interest compounds the less interest there is making it more worth than the simple but if the compounding occurs more frequently the simple 5% interest is more worth it. In this situation I think it might just be yearly interest which makes the 3% compound more worth taking for this short amount of time.
6 0
3 years ago
The additional dining space will occupy space next to Olaf’s that was recently rented to a tenant. By claiming the space for the
Illusion [34]

Answer:

$12,146

Explanation:

The computation of present value of this opportunity cost is shown below:-

Net After tax Operating Profit Per month = Rent space per month × Profit margin on the renting the space percentage

= $1,000 × 30%

= $300

Project is for 4 Years

Total months = 4 × 12

= 48 Months

Interest Rate Per month = 9% ÷ 12

= 0.75%

As per the question the Rent is Received at the start of the month

So Present Value of this opportunity cost = $300 (1 + PVAF (0.75%,47))

= $300 × ( 1 + 39.486)

= $12,145.85

= $12,146

3 0
3 years ago
Other questions:
  • URGENT!
    15·1 answer
  • Bear Publishing sells a nature guide. The following information was reported for a typical month: Total Per Unit Sales $ 17,600
    8·1 answer
  • A firm is considering a project that will yield $10,000 per year for 10 years. The required return on this project is 12.05%, co
    6·2 answers
  • An invisible barrier that blocks the promotion of a qualified individual in a work environment because of the individual's gende
    15·1 answer
  • Ivy Corporation gave 96 people a bonus. If Ivy had given 2 more people bonuses, Ivy would have rewarded 2/3 of the workforce. Ho
    12·1 answer
  • Woodridge Corporation manufactures numerous products, one of which is called Alpha-32. The company has provided the following da
    12·1 answer
  • Jim is in the market for a car that will last for the next 10 years and has saved up some money for the purpose of a car. what’s
    11·2 answers
  • So there this girl and she is ...um ...a lot we were friends for along time and then she started starting fights with me and bei
    7·1 answer
  • During its first year of operations, Silverman Company paid $11,625 for direct materials and $11,000 for production workers' wag
    7·1 answer
  • An intangible benefit is called a <br><br> a) commodity<br> b) Service<br> c) market<br> d) goods
    15·2 answers
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!