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3. Immunization (a) Suppose a company is balancing their future liabilities with long term bonds (i.e. the bonds will mature after the liabilities are due,
3. Immunization (a) Suppose a company is balancing their future liabilities with long term bonds (i.e. the bonds will mature after the liabilities are due, and the company will use a line of credit at interest rate j to postpone payment of the liabilities until the bonds are redeemed. Explain what types of interest rate changes would put this financial arrangement at risk of a shortfall for the company (b) Consider a $1000liability due in 5 years. Construct a fully immunized portfolio which matches this liability in present value and duration and uses any selection of risk free zero coupon bonds from the following term structure for risk free 6 interest rates, 5% 5.5% 6% 6.5%
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