Question 3 (10 Marks) You are responsible for overseeing a number of employee entitlement liabilities, which will be due in the coming years: Due in 2 years 6 years 7 years Amount ($) 331,200 132,500 249,000 You would like to ensure that the firm will be able to meet these liabilities, so you decide to formulate an immunisation strategy to ensure this can take place. The yield to maturity is 5% p.a. Required: a) What would be the maturity of a single zero-coupon bond, and its face value, which would immunise the overall obligation? (2 Marks) b) You have identified two bonds which you would like to use as part of an immunisation strategy. The first is a 4% coupon bond which pays coupons semi-annually, and 1 year to maturity. The second is a zero-coupon bond with 8 years until maturity. Assume the face value of each of the bonds is $1000. Calculate the weighting and the number of each bond required in order to immunise the overall obligation. Assume for this part, that bond yields are 5% p.a. (5 Marks) c) Show what happens to the net position of your portfolio in b), if bond yields change immediately to 6% p.a.? (3 Marks) Question 3 (10 Marks) You are responsible for overseeing a number of employee entitlement liabilities, which will be due in the coming years: Due in 2 years 6 years 7 years Amount ($) 331,200 132,500 249,000 You would like to ensure that the firm will be able to meet these liabilities, so you decide to formulate an immunisation strategy to ensure this can take place. The yield to maturity is 5% p.a. Required: a) What would be the maturity of a single zero-coupon bond, and its face value, which would immunise the overall obligation? (2 Marks) b) You have identified two bonds which you would like to use as part of an immunisation strategy. The first is a 4% coupon bond which pays coupons semi-annually, and 1 year to maturity. The second is a zero-coupon bond with 8 years until maturity. Assume the face value of each of the bonds is $1000. Calculate the weighting and the number of each bond required in order to immunise the overall obligation. Assume for this part, that bond yields are 5% p.a. (5 Marks) c) Show what happens to the net position of your portfolio in b), if bond yields change immediately to 6% p.a