Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Problem 4 (Required, 25 marks) A company needs to pay L1 = $55435.89 after 3 years and pay another L2 = $14105.99 after 10 years.

image text in transcribed
Problem 4 (Required, 25 marks) A company needs to pay L1 = $55435.89 after 3 years and pay another L2 = $14105.99 after 10 years. To fulfil the liabilities, the company can invest its wealth into following three bonds: Bond A: 2-year zero coupon bond Bond B: 6-year zero coupon bond Bond C: 12-year zero coupon bond Suppose that the company wishes to have a portfolio which is immunized against a small change in interest rate (ie, the company can still fulfil the obligation when there is a small change in interest rate in future) We assume that the company can buy any unit of each bond and no short-selling is allowed. The term structure is assumed to be flat ad the annual effective interest rate is currently lo = 3.5%. (a) Is it possible for the company to fulfil the liability using cash-flow matching immunization? Explain you answer. (b) Is it possible for the company to fulfil the liability using Redington's immunization? Find all possible portfolios if it is possible. (c) Is it possible for the company to fulfil the liability using full immunization? Find a portfolio (not all) if it is feasible. Problem 4 (Required, 25 marks) A company needs to pay L1 = $55435.89 after 3 years and pay another L2 = $14105.99 after 10 years. To fulfil the liabilities, the company can invest its wealth into following three bonds: Bond A: 2-year zero coupon bond Bond B: 6-year zero coupon bond Bond C: 12-year zero coupon bond Suppose that the company wishes to have a portfolio which is immunized against a small change in interest rate (ie, the company can still fulfil the obligation when there is a small change in interest rate in future) We assume that the company can buy any unit of each bond and no short-selling is allowed. The term structure is assumed to be flat ad the annual effective interest rate is currently lo = 3.5%. (a) Is it possible for the company to fulfil the liability using cash-flow matching immunization? Explain you answer. (b) Is it possible for the company to fulfil the liability using Redington's immunization? Find all possible portfolios if it is possible. (c) Is it possible for the company to fulfil the liability using full immunization? Find a portfolio (not all) if it is feasible

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Crypto Finance Law And Regulation

Authors: Joseph Lee

1st Edition

0367086611, 978-0367086619

More Books

Students also viewed these Finance questions