Assume your company has a liability with 11.5 years of Macaulay duration.

1. a) How would you immunize the liability using 5-year zero coupon bonds and perpetuities paying annual coupons, each currently yielding 3%?

1. b) If Ms. Kim suggests that an appropriate investment to immunize your liability (11.5 years of Macaulay duration) would be 13-year 2.13% coupon bonds at a yield to maturity of 2% pa. Coupon rate and the yield to maturity are expressed as an annualized percentage rate compounded annually. Coupons are paid annually. Do you agree or disagree with Ms. Kim? Why?