Financial institution which has a possible liability payment

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Reference no: EM13747389

Consider a financial institution which has a possible liability payment of $ 2.5 million at the end of 3 years. The institution is currently considering an investment in a bond portfolio with a view to ensure that it would able to meet the liability after 3 years.

The bonds under consideration are:

Bond A : 7% coupon, 3 years maturity

Bond B : 8% coupon, 4 years maturity

With a view to immunize the portfolio, please advise in what proportions of the portfolio should the institution invest in each of the bonds.

6 months later, the interest rates have increased from 7% to 8%. The revised duration of the liability, Bond A and Bond B are as under:

Liability : 2.5 years

Bond A : years

Bond B : years

Please advise the company on what rebalancing it needs to do to ensure the portfolio remains immunized.

Reference no: EM13747389

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