Credit Corp (CCP) is an Australian receivables management company which provides debt purchase and debt collection services, primarily focusing on the acquisition of purchased debt ledgers (PDLs) comprised of distressed consumer debt from Australian and New Zealand banks, finance companies, and telecommunication companies. Using the last 5 years of monthly data, CCP is reported to have a beta of 0.61 compared to the ASX200. The annual risk-free interest rate is 1.5% and the expected rate of return on the market is 10% p.a. CCP had a closing price today of $17.05. It will pay a dividend of $0.75 at the end of the year.

7. CCP has issued superannuation pension guarantees. Under these guarantees, they will be required to pay $30 million in 3 years time. They would like to put some money away now at a certain interest rate to ensure they will have enough to meet their liability. Further, they are also concerned about changes in the rate at which they can invest. In order to effectively immunize their position, please answer the following questions:

a. What duration bonds should they be looking for in order to effectively immunise?

( 2 marks)

b. CCP has bought an appropriate duration bond. One year later (ie 2 years before the single-payment obligation), the government interest rate drops 2%. How does the 'immunisation' work in this case? Ie what happens to bond price? Reinvestment rate? Do you expect CCP will still be able to meet the obligation? (3 marks)