A financial institution has an investment horizon of 2 years 9.33 months

(or 2.777 years). The institution has converted all assets into a portfolio of 8 percent, $1,000 three-year bonds that are trading at a yield to maturity of 10 percent. The bonds pay interest annually. The portfolio manager believes that the assets are immunized against interest rate changes.

a. Is the portfolio immunized at the time of the bond purchase? What is the duration of the bonds?

b. Will the portfolio be immunized one year later?

c. Assume that one-year, 8 percent zero-coupon bonds are available in one year.

What proportion of the original portfolio should be placed in these bonds to rebalance the portfolio?

The following questions and problems are based on material in Appendix 9A at the book’s website (www.mhhe.com/saunders11e).