ABC Pension Fund has a single $50 million liability due in nine years, and wants you to construct a bond portfolio that earns a rate of return sufficient to pay off the obligation. The Pension Regulator has established that all pension liabilities must be discounted using the yield-to-maturity maturity of risk-free assets. US Treasury bonds with 9-year maturity are currently trading at 4% annual yield to maturity.

2. Determine the value of ABCs Pension Liability (2.5 points)
3. Determine the minimum market value of the portfolio you need to pay off the obligation, and the minimum rate of return (yield) your constructed portfolio will need to generate in order to pay off the $50 million obligation. (2.5 points)

The below portfolios consist of coupon-paying, investment- grade, corporate and government bonds of various maturities because zero- coupon bonds are unavailable.

1. Determine which of the portfolios below will best immunize the liability. JUSTIFY YOUR ANSWER (5 points)

Proposed Portfolios
	Portfolio 1	Portfolio 2	Portfolio 3	Portfolio 4
Yield to Maturity	3.5%	7.25%	5.35%	5.15%
Time to Maturity	11.2 years	9.8 years	9.0 years	10.1 years
Macaulay Duration	9	8.9	8.0	9.1
Modified Duration	8.70	8.30	7.60	8.65