A high networth investor Mr. Rama Murthy has a corpus of Rs.10,00,000 earmarked for

fixed income securities. The investment horizon is 5 years.

He is considering investment in one of the following:

A.

12% non-convertible debentures of Rajesh Steel Limited (Face value Rs,1,000)

selling at par. These debentures will be redeemed at par after 5 years, Interest is

payable annually.

B.

14% non-convertible debentures of Jayesh Float-glass Ltd. (Face value Rs.1,000)

selling at Rs.1100. These debentures will be redeemed at par after 7 years. Interest is

payable annually.

You are required to:

a

Find the interest rate risks of the two investments if the market interest rate increases

by 1%.

b.

Help Mr. Rama Murthy to immunize the investment against any immediate change

in interest rates. Which one of the aforementioned instruments will you recommend

him for this purpose? Give reasons.

C.

State whether the investment recommended in (b) above offer perfect immunization

and also give conditions to be fulfilled for perfect immunization of bond investment.