A pension plan is obligated to make disbursements of $3.3 million, $4.0 million, and $3.3 million...

Question:

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.)

Perpetuity:

Perpetuity is a cash flow in which the amount is paid at the end of each period for indefinite period of time. The amount in the perpetuity is fixed and the cash flow occurs at regular interval.

Answer and Explanation: 1

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Year (A)Payment (B)PVIF @ 10% (C)PV of payment ((D) = (B) * (C))Weight of payment ((E) = (D)/(Total D) * 100)Product of year and weights ((F) = (A) *...

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What is a Perpetuity? - Definition & Formula

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Chapter 6 / Lesson 4
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Learn what perpetuity is in finance. Understand the meaning and definition of perpetuity, its characteristics and how its present value can be found using a formula.


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