A bank accepts a cash deposit now of $200,000 and promises to pay $ 293866 in 5 years. its a guaranteed investment contract GIC. the bank then invest the 200,000 by buying coupon-paying bonds that are selling @ par each bond is $1000 par 8% annual coupon , 6-year maturity , 5- year duration.
1- how many bonds will bank buy ?
2- what is the implied interest rate on the GIC deposit ?
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3- after the bank buys the bonds. Market interest rates go to 7% and stay there. the bank will sell the bonds after 5 years to pay the GIC deposit :
A) how much will the bank have from re-invest coupons for each bond ?
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B) what will the bank receive when they sell each bond?
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C) show how close the bank has come to immunizing their position ?