16-5

Pension funds pay lifetime annultles to reciplents. If a firm will remain in business Indefinitely, the pension obligation will resemble a perpetulty. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $2.5 million per year to beneficlarles. The yleld to maturity on all bonds Is 10.5%. a. If the duration of 5 -year maturity bonds with coupon rates of 12.2% (pald annually) is four years and the duration of 20 -year maturity bonds with coupon rates of 5% (pald annually) is 11 years, how much of each of these coupon bonds (In market value) will you want to hold to both fully fund and Immunize your obligation? (Do not round Intermedlate calculatlons. Enter your answers In millions rounded to 1 decimal place.) b. What will be the par value of your holdings in the 20-year coupon bond? (Do not round Intermedlate calculations. Enter your answer In millions rounded to 2 declmal places.)