Question
PLEASE ITS URGENT, PLEASE ITS URGENT Suppose an Insurance Company has to make a guaranteed payment $1,000 to a policyholder in a few years (I
PLEASE ITS URGENT, PLEASE ITS URGENT
Suppose an Insurance Company has to make a guaranteed payment $1,000 to a policyholder in a few years (I am not telling you how many years). In order to immunize this payment against any interest rate risk, the company used 8% coupon bond with 6 year maturity when the yield is also 8%. The bond successfully immunizes against the interest rate risk on the payment for now.
A year later, there is a mismatch in the duration between the payment and the bond portfolio. The Insurance Company needs to replace some of the coupon bonds with zero-coupon bonds to remain immunized. Suppose there are zero coupon bonds available for which the payment is due in 1 year, what fraction of the old portfolio of coupon bonds need to be replaced with zero coupon bonds for full immunization?
A. 14.38%
B. 0%
C. 9.36%
D. 19.72%
E. 7.19%
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