Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $3.0 million per year to beneficiaries. The yield to maturity on all bonds is 15.5%.

a. If the duration of 5-year maturity bonds with coupon rates of 13.8% (paid annually) is 4 years and the duration of 20-year maturity bonds with coupon rates of 4% (paid annually) is 11 years, how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize your obligation?

5 YEAR BOND = $ ? MILLION

8YEAR BOND = $ ? MILLION

b. What will be the par value of your holdings in the 20-year coupon bond?

PAR VALUE = $ ? MILLION