Duration matching with rebalancing after a big market move. A pension fund must make two fixed payments (2 liabilities). The first is payment of $100M in 10 years. The second is a payment of $50M in 30 years. The current market interest rate is 3% at all maturities. The fund has $100M available to invest. The fund can allocate its assets between a 5-year zero-coupon and a 20-year zero-coupon bond. The fund wants to stabilize its equity/assets ratio. 1. What is the initial equity value of the fund? A. 4.66M B. 4.77M C. 4.88M D. 4.99M 2. What fraction of assets should be invested in the 20 year bond? Answer: % (round answer to nearest two decimal places) Right after the fund is set up, the market yields jump from 3% to 4%. What is the new equity value of the fund? Answer: $ M (round answer to nearest two decimal places) After the yield jump, would you recommend to buy or sell 20 years bonds? O A. buy B. sell What face value of 20 year bonds would you recommend for the fund after the yield jump? Answer: $ M (round answer to nearest integer) Duration matching with rebalancing after a big market move. A pension fund must make two fixed payments (2 liabilities). The first is payment of $100M in 10 years. The second is a payment of $50M in 30 years. The current market interest rate is 3% at all maturities. The fund has $100M available to invest. The fund can allocate its assets between a 5-year zero-coupon and a 20-year zero-coupon bond. The fund wants to stabilize its equity/assets ratio. 1. What is the initial equity value of the fund? A. 4.66M B. 4.77M C. 4.88M D. 4.99M 2. What fraction of assets should be invested in the 20 year bond? Answer: % (round answer to nearest two decimal places) Right after the fund is set up, the market yields jump from 3% to 4%. What is the new equity value of the fund? Answer: $ M (round answer to nearest two decimal places) After the yield jump, would you recommend to buy or sell 20 years bonds? O A. buy B. sell What face value of 20 year bonds would you recommend for the fund after the yield jump? Answer: $ M (round answer to nearest integer)