Mr Brown Wants to Invest $100,000 for the Next ?Ve

question 17

Essay

Mr. Brown wants to invest $100,000 for the next ?ve years. He purchases an annuity from a ?nancial institution. Currently the term structure is ?at at 10% (yearly compounded).
i. If the payments are made yearly, what is the amount that the ?nan- cial institution will agree to pay Mr. Brown?
ii. Assume that there is a 5-year ?xed coupon bond that pays 12% coupon every year. What is the price and duration of the bond?
iii. How much must the ?nancial institution invest in the long-term bond in order to hedge the position? What should it do with the remainder of the money?

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Definitions:

Progressive Discipline Policy

A system of discipline where the penalties increase upon repeat occurrences of misconduct.

Written Warning

A documented notice of violation or misconduct, typically given by an employer to an employee as part of disciplinary procedures.

NLRB

The National Labor Relations Board, an independent agency in the United States responsible for enforcing US labor law in relation to collective bargaining and unfair labor practices.

Unionization

The process of forming a union by workers to collectively negotiate wages, work hours, benefits, and working conditions with their employer.