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A company has a future obligation to pay $1000 two years from now. To immunize this obligation the company has available 2 bonds, A and
A company has a future obligation to pay $1000 two years from now. To immunize this obligation the company has available 2 bonds, A and B. Bond A is a zero-coupon bond with 1 year of maturity. Bond B is a zero-coupon bond with 3 years of maturity. Both bonds have face values of 100. The current interest rate is 5%. By combining bonds A and B, show how one can create a position in the bonds with duration equal to the duration of the payment obligation. How many of each bond should you buy?
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