Question
A financial institution has to pay $1,000 after 2 years and $2,000 after 4 years. The current market interest rate is 10%, and the yield
A financial institution has to pay $1,000 after 2 years and $2,000 after 4 years. The
current market interest rate is 10%, and the yield curve is assumed to be flat at any
time. The institution wishes to immunize the interest rate risk by purchasing zero-
coupon bonds which mature after 1, 3 and 5 years. One member in the risk
management team of the institution,
Alan, devised the following strategy:
Purchase a 1-year zero-coupon bond with a face value of $44.74,
Purchase a 3-year zero-coupon bond with a face value of $2,450.83,
Purchase a 5-year zero-coupon bond with a face value of $500.00.
(d) Find the convexity of the portfolio of assets and the portfolio of liabilities at i = 10%.
(e) Did Alan's portfolio satisfy the Conditions of Redington's Immunization strategy?
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