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Pension funds pay lifetime annuities to recipients. If a firm expects to remain in business indefinitely, its pension obligation will resemble a perpetuity. Suppose, therefore,

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Pension funds pay lifetime annuities to recipients. If a firm expects to remain in business indefinitely, its pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $2 million per year to beneficiaries. You consider using the following two bonds to immunize your obligation. Assume the yield to maturity on all bonds is 10%. Bond Par Maturity Coupon Yield to Maturity . 1,000 5-year 10%, Annual Payment 10% B 1,000 25-year 4.5%, Annual Payment 10% b) You also calculate the duration of bond B and find it to be 11.5 years. How much of each of these two bonds (in market value) will you want to hold to both fully fund and immunize your obligation? Assume market interest rate remains at 10%. (3pts)

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