10. a A pension plan is obligated to make disbursements of $3.3 million. $4.0 mi

ID: 2708987 • Letter: 1

Question

10. a A pension plan is obligated to make disbursements of $3.3 million. $4.0 million. and $3.3 million at the end of each of the next three years. respectively. The annual interest rate is 10%. If the plan wants to fully fund and immunize its position. how much of its portfolio should it allocate to one-year zero-coupon bonds and perpetuities. respectively. if these are the only two assets funding the plan? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Investment in one-year zero-coupon bonds Investment in perpetuity Portfolio A bond currently sells for $1.050. which gives it a yield to maturity of 6%. Suppose that if the yield increases by 25 basis points, the price of the bond falls to 61.025. What is the duration of this bond? (Do not round intermediate calculations. Round your answer to 4 decimal places.) Duration

Explanation / Answer

September cash sales..............................................

$7,400

September collections on account:

July sales: $20,000 × 18%...................................

3,600

August sales: $30,000 × 70%...............................

21,000

September sales: $40,000 × 10%.........................

4,000

Total cash collections..............................................

$36,000

Payments to suppliers:

August purchases (accounts payable)....................

$16,000

September purchases: $25,000 × 20%.................

5,000

Total cash payments...............................................

$21,000