Question
An insurance company has 3 years left on a retirement annuity that pays the retiree $20,000 per year at the end of the next 3
An insurance company has 3 years left on a retirement annuity that pays the retiree $20,000 per year at the end of the next 3 years. You have to ensure the funds are there to back the annuity. This is a risk-free annuity, and the risk-free rate is 5%. The only two investments available to you are a 5-year zero and a 1-year zero, both yielding 5%. How much do you need to invest in each of the zeros to immunize the insurance company's liability?
A. 76% in the 1-year zero and 24% in the 5 year zero
B. 50% in the 1-year zero and 50% in the 5 year zero
C. 75% in the 1-year zero and 25% in the 5 year zero
D. 77% in the 1-year zero and 23% in the 5 year zero
Answer is A, but I don't know how to work it out. Please provide manual step-by-step solutions.
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