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Jenny manages a pension fund that will provide retired workers with lifetime pensions. She has determined that the payouts of the fund approximate a perpetuity
Jenny manages a pension fund that will provide retired workers with lifetime pensions. She has determined that the payouts of the fund approximate a perpetuity of $1,700,000 per year.The applicable interest rate is 10% compounded annually. Jenny plans to fully fund the pension obligation with 5-year and 20-year maturity zero coupon bonds.
- How much in dollars should Jenny invest in each of the two zero coupon bonds to immunize the obligation against interest rate changes?
- What would be the face value (i.e., $ value at maturity) of each of the two zero coupon bonds funding the plan? Assume annual compounding.
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