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es has just instituted a pension plan for its top executives. The way the plan w

ID: 2802248 • Letter: E

Question

es has just instituted a pension plan for its top executives. The way the plan works is hat when an executive retires, the value of all benefits are transferred to his or her personal a This means that at retirement, MNG makes lump sum payments of pension benefits to its executives. s actuaries estimate that there will be three waves of retirements. The first will be in 3 years and require a total lump-sum payment of $6 million; the second will be in 4 years and require a total lump-sum payment of $9 million; the third will be in 6 years and require a total lump-sum payment of $9.8 million. Assume the current yield curve is flat at 5% a. How much is MNG willing to pay someone to take this liability off its hands? b. What is the duration of MNG's pension liability? c. Suppose that MNG decides to utilize an immunization strategy that exclusively involves two Government of Canada coupon bonds. One is a 3-year 6% annual coupon bond, and the other is a 7-year 5% annual coupon bond. How much money should MNG invest in each of the two bonds? What is the par value (face value) of each of the bonds from (c)? d.

Explanation / Answer

Part A & B

A. MNG Liability = 19,899,860

B. Duration =4.48 Years

Year(A) Cashflow(B) PVF @ 5%(C) DCF(D) Proportion(E) Duration(F=E*A) 3 6,000,000 0.8638 5,182,800 0.2604(5182800/19899860) 0.7812 4 9,000,000 0.8227 7,404,300 0.3721 1.4884 6 9,800,000 0.7462 7,312,760 0.3675 2.205 Total 19,899,860 1 4.4746