Question
Immunization: Assume that your employer has a $1.5 million liability coming due in precisely six years. The Chief Financial Officer (CFO) of your organization would
Immunization: Assume that your employer has a $1.5 million liability coming due in precisely six years. The Chief Financial Officer (CFO) of your organization would like to use one of the larger bonds in your portfolio to immunization this liability. The characteristics of the selected bond are: 7.5 years until maturity 6.0% coupon (payments semi-annual) Current Price = 102.500 (not dollars) The CFO is very nervous and fears that instability in the market could reduce the yield on this bond to 3.5% (annually) precisely 2.0 years after purchase. Your task is to prove that whether interest rates remain as is or change in the manner predicted by the CFO, the future value of the cash flows related to this investment will come very close to satisfying the future liability.
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