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Consider the following problem: An insurance company must make a payment of 19,487 in 7 years. The market interest rate is 10%, so the present
Consider the following problem:
An insurance company must make a payment of 19,487 in 7 years. The market interest rate is 10%, so the present value of the obligation is 10,000. The company's portfolio manager wishes to fund the obligation using 3-year zero-coupon bonds and perpetuities paying annual coupons.
- How can the manager immunize the obligation?
Suppose that 1 year has passed, the interest rate remains at 10%. The portfolio manager needs to re- examine her position. Is the position still fully funded?
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