Please dont use excel Suppose that a company receives a payment (asset) of $1100
ID: 2794533 • Letter: P
Question
Please dont use excel
Suppose that a company receives a payment (asset) of $1100 at time t-l and $1,331 at time t-3. Suppose they have liabilities of $2,420 at time t-2. At an annual effective rate of interest of 10%, the present value of assets and liabilities are equal and the duration of the assets equals the duration of the liabilities. Determine the maximum rate of interest on which the convexity of assets is greater than the convexity of liabilities (i.e find the maximum effective rate for which the payment streams are immunized.) Hint: you will need to find the "price functions" as functions of i and take derivatives. 6.
Explanation / Answer
COMPUTATION OF EFFECTIVE RATE OF INTEREST OPTION 1 YEAR PARTICULARS AMOUNT PVF@10% PRESENT VALUE PVF@15% AMOUNT 1 RECEIEVES AMOUNT 1100 0.909091 1000 0.869565 956.5217 2 PAID LIABILITY -2420 0.826446 -2000 0.756144 -1829.87 3 RECEIEVES AMOUNT 1331 0.751315 1000 0.657516 875.1541 0 1.80817 there fore if the rate of interest is 15% or more than he can get more benefit