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Consider an insurance company with liabilities of 2 0 m in years 1 4 , 1 5 , 1 7 , and 1 8 years.
Consider an insurance company with liabilities of m in years and
years. Your assets consist of m in cash. You are uncertain about your net worth
and would like to immunize your net worth by investing in two zerocoupon bonds
with maturities and years. The price of the year bond is and the price
of year bond is Assume that the current term structure is flat at
a What is the present value of your liabilities?
b What are the duration and the modified duration of your liabilities?
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