415 Inc has a pension liability that obligates it to pay out $3 million per year for the next 20 years. The term structure of interest rates is flat and the current interest rate is 3%. You intend to invest in 5- and 20-year STRIPS (with face value of $100) to cover the obligation.

(a) What is the value of the pension obligation?

(b) What is the duration of the pension obligation?

(c) If you want to hedge the interest rate risk, specify the number of bonds (using thousands) you should invest in the

(i) 5-year STRIP?

(ii) 20-year STRIP?

(d) Is this a perfect hedge? Yes, No?