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Problem 16.6

An insurance company must make payments to a customer of $7 million in 1 year and $3 million in 3 years. The yield curve is flat at 8%.

a.

If it wants to fully fund and immunize its obligation to this customer with a single issue of a zero-coupon bond, what maturity bond must it purchase? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Maturity of zero coupon bond years
b.

What must be the face value and market value of that zero-coupon bond? (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places. Omit the “$” sign in your response.)

Face value $
Market value $

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