Reference no: EM133068835
A corporate pension plan has to pay 24 million every year forever, starting in 12 months. Bonds of all maturities currently yield 9%. You can invest in the following bonds:
1. A coupon bond with a maturity of 4 years and a duration of 3 years.
2. A coupon bond with a maturity of 30 years and a duration of 22 years.
What is the present value of liabilities (in millions)?
What is the durability of the liability?
What percentage of assets should the fund invest in the 4 year bond to fully immunize its obligations(give answer as decimal up to four places)?
How much should the fund invest in the 4 year bond ( in $millions)?
Which of the following is true about immunization?
It is an active bond management technique with the purpose of identifying undervalued bonds.
Tax swap is an example of an immunization strategy.
Its main purpose is to offset the price and reinvestment risk and to protect a fund's net worth from interest rate volatility.
Its main purpose is to protect net worth from exchange rate risk.
It is a strategy used in the forecasting of bond returns based on predictions of the yield curve at the end of the investment horizon.