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5. A define-benefit pension fund has following holdings in their fixed-income portfolio: Bond Credit Coupon Rate Modified Convexity Market Maturity (yr) Rating Duration Value of
5. A define-benefit pension fund has following holdings in their fixed-income portfolio: Bond Credit Coupon Rate Modified Convexity Market Maturity (yr) Rating Duration Value of Position A US Treasury 3.1 0.3 2.738 9.8 B 1 9.8 7.5 6.452 56.2 + C Aa2 5. 2 11.5 3. 733 18.5 $50,000 $50,000 $50,000 $50,000 $50,000 $250,000 D 6.7 9.8 4. 874 32.3 Agency Aa3 E 12. 1 1.8 10. 921 128.4 Total i) Calculate modified duration for this portfolio. ii) the modified duration of pension' s liabilities is 6. 50 years. Comment on immunization against interest rate risk; iii) how can you increase the convexity of the portfolio while keeping modified OF CA duration unchanged? iv) You forecast that both Treasury yields and credit spreads will decrease in the near future. How will you adjust the existing portfolio according to this view? 5. A define-benefit pension fund has following holdings in their fixed-income portfolio: Bond Credit Coupon Rate Modified Convexity Market Maturity (yr) Rating Duration Value of Position A US Treasury 3.1 0.3 2.738 9.8 B 1 9.8 7.5 6.452 56.2 + C Aa2 5. 2 11.5 3. 733 18.5 $50,000 $50,000 $50,000 $50,000 $50,000 $250,000 D 6.7 9.8 4. 874 32.3 Agency Aa3 E 12. 1 1.8 10. 921 128.4 Total i) Calculate modified duration for this portfolio. ii) the modified duration of pension' s liabilities is 6. 50 years. Comment on immunization against interest rate risk; iii) how can you increase the convexity of the portfolio while keeping modified OF CA duration unchanged? iv) You forecast that both Treasury yields and credit spreads will decrease in the near future. How will you adjust the existing portfolio according to this view
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