Question
As a member at a pension fund desk, you are planning a payment of $600,000 to be made four years from now and you would
As a member at a pension fund desk, you are planning a payment of $600,000 to be made four years from now and you would like to make investments in bonds to meet this future obligation. Three bonds are available, all paying semi-annual coupons (with a par of $100) and currently yielding 5.36% (compounded continuously). Detailed bond information is as follows:
Bond A: coupon rate = 6.0% maturity = 3 years Bond B: coupon rate = 4.2% maturity = 7 years Bond C: coupon rate = 7.4% maturity = 15 years
A) How much to invest in Bonds A and B if they are used for immunization?
B) How much is your investment after four years if the yield remains at 5.36%?
C) How much is your investment worth after five years if the yield changes to 4.9% right after immunization? Would you have a shortfall if you didnt immunize?
D) Suppose you just took over a bond portfolio from another desk which consists of $200,000 investment in Bond A and $600,000 investment in Bond B. You are given another $400,000 to invest. Your mandate is to ensure a yield of 5.36% over the next six years. While you allocate the $1,200,000 fund among the three bonds, you must maintain the initial proportions of investment in A and B (i.e., maintaining a ratio of 1/3). How would you allocate the $1,200,000 fund to achieve this mandate?
E) Continuing from part D), how much would your total portfolio be worth after six years if the yield changes to 5.68% right after immunization
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started