1. The promised cash flows of three securities are listed here. If the cash flows are risk-free, and the risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid.
2. After reading your company’s annual report you decide to compute the total obligation of the firm’s defined benefit retirement plan Fund. After some research you determine that your company’s promised pension payments amount to $10 million dollars annually, and you expect this obligation to grow at 2% per year. You determine that the riskiness of this obligation is the same as the riskiness of the company’s debt. Based on the pricing of that debt you determine that the correct discount rate for the Fund’s liabilities is 3% per annum. Currently, based on actuarial calculations using 8% as the discount rate, the plan is neither over nor underfunded — the value of the liabilities exactly matches the value of the assets. What is the extent of the true unfunded liability?