Question

Immunization . Example: An insurance company issues a guaranteed investment contract (GIC) for $10,000. If the GIC has a five-year maturity and a guaranteed interest rate of 8%, i t promises to pay $10,000 x 1.085= $14,693.28 . The company can choose to fund its obligation with $10,000 of 8% annual coupon bonds, selling at par value, with six years to maturity. As long as the market interest rate stays at 8 %, the company has fully funded the obligation. Why? . What if the interest rate fluctuates?

Answer 1

1) WHAT IF INTEREST RATE FLUCTUATES?\

A) As we see its a 5 year maturity  term and it can vary with coupon bonds and as the the obligation and as well as the rate of maturity with 6 year and 8 % stays even and have a par value with 10000at 8% is 800 that is for 6 year it would be 4800 so the rate of 10000 will be deducted from this which have the rate of 5200 and it is a par value its the first case with the given interest rate.if the interest rate fluctuates the amount will vary and have a predetermined rate with the coupon bonds and have it by 15344.29 with the fluctuation so if the rate fluctuates it is even to see that the amount will grow a bit higher but minimal to the value that was stated which is $10000*1.08 =10800