financial mathematics writing assignment

You are an actuary providing your services as a consultant for a bank. The bank has an opportunity to make a package of loans totaling 500 million (500M). This package of loans will be repaid by level end of year payments totaling 50M for 30 years.

In order to o↵set some of the bank’s initial liability and generate capital for this invest- ment the bank asks you to structure a bond for them. The purchase price must be 200M and it will have annual coupons. It is your goal to set the face value (F) nominal coupon rate (↵(1)) and redemption amount (C).

Notice, if the bank had not packaged up the debt into a bond, and just made the package of loans through its own capital, then the bank’s APY would have been 9.3%. You should try and find a set of values for F, C, ↵(1) which get the bank’s APY as close to the original 9.3%, or higher. as you can. Also, to make the bond a worthwhile investment to the investor you should ensure that the APY to the investor is at least 1%.

 

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