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Sept '10 Q7

D

DaddyCruel

Member
Hi All,

Sept '10, Q7, (ii) (c)

Find the nominal amt invested in a (A)3y and (B)12 y Zero to match debt.

The PV of the debts is 81.109M and the DMT is 5.1773
All good so far.
Now the answer they come out with is 69.164M in A and 31.4M invested in B.

These amts sum to more than the PV of the debt.

Any ideas?
Thanks, DC
 
The nominal amount of a zero-coupon bond is the amount you get back at maturity (ie after 3 or 12 years in this case).

The cost of the zero-coupon bond will be the present value of the maturity payment, and it's this PV that should equal the PV of the liabilities.
 
Thanks Mark,

Can you confirm my approach is correct...

I work out amt to invest now is by matching DMT(Liab) with DMT(Assets)
and solving for the proportion to invest in each.

Having found the amt to invest, I now multiply by (1+i)^3 in the case of the 3y zero to find the nominal amt.

Thanks, DC
 
Yes, I think you could do that. If it gets you to the same answer, then its fine!

Or just let X be the nominal amount of one of the bonds, let Y be the nominal amount of the other and then solve for X and Y as in the example in Section 4.5 of Chapter 14.
 
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