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A financial institution issues a guaranteed investment contract for $20,000 to its customers, which has a 7-year maturity and a guaranteed interest rate of 6%
A financial institution issues a guaranteed investment contract for $20,000 to its customers, which has a 7-year maturity and a guaranteed interest rate of 6% per year. The institution wants to fund the obligation using two debt instruments, which include 5-year zero-coupon bonds selling at a yield-to-maturity (YTM) of 5%, and also 5% annual coupon-paying perpetuities selling at par. Answer the following questions with steps of calculation shown: a. Describe an immunized portfolio for the first year such that the duration of asset portfolio is equal to the duration of the single-payment liability. b. Next year, assume that YTM will remain at 5%. Describe the rebalancing strategy for the immunized portfolio. A financial institution issues a guaranteed investment contract for $20,000 to its customers, which has a 7-year maturity and a guaranteed interest rate of 6% per year. The institution wants to fund the obligation using two debt instruments, which include 5-year zero-coupon bonds selling at a yield-to-maturity (YTM) of 5%, and also 5% annual coupon-paying perpetuities selling at par. Answer the following questions with steps of calculation shown: a. Describe an immunized portfolio for the first year such that the duration of asset portfolio is equal to the duration of the single-payment liability. b. Next year, assume that YTM will remain at 5%. Describe the rebalancing strategy for the immunized portfolio
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