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:

Follower Rises

The motion of a follower mechanism moving upwards as a result of the cam profile's action in cam-follower systems.

Cam Displacement Diagram

A graphical representation used in mechanical engineering to show how the position of a cam changes over time.

Working Drawing

Detailed drawings that provide all the information necessary for the manufacture or construction of a part or assembly.

Detailed Drawing

A technical drawing that provides comprehensive details needed to fabricate or manufacture a part, including dimensions, materials, and specifications.