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What is the macaulay duration of step

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Reference no: EM133061422

Afin-Super is the largest superannuation and pension fund in Macquarieland. To promote pension and annuity service, Afin-Super is serving a short-term experience plan(STEP). Plan joiners will be paid $10,000 once a year for a 2-year period (2 payments in total). The first payment will come in 5 years from now.

The yield curve is flat at 5% for all maturity. Interests are compounded annually.

(a) What is the Macaulay duration of STEP?

(b) Afin-Super plans to use 5-year and 8-year zero-coupon bonds to immunise STEP. How much money should Afin-Super allocate to these bonds for each STEP obligation?

(c) If the whole yield curve suddenly shifts to 2% right after the first payment be made 5 years from now:

(i) How much will Afin-Super be short of in the last payment, if Afin-Super do not immunise the obligation?

(ii) How much will Afin-Super be short of in the last payment, if Afin-Super keep their immunising portfolio?

(d) Explain the differences in the result of (c i) and (c ii).

(e) Give one pros and cons of immunising obligation using bond funds.

Reference no: EM133061422

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