Question 4

4. (25 points) A liability consists of a series of 20 annual payments of $5,200, with the rst payment to be made one year from now. The assets available to immunize this liability are 5-year and 10-year zero-coupon bonds. The annual effective interest rate used to value the assets and the liability is 5.8%. The portfolio of bonds will be used to get Redington immunization, so the liability has the same present value and Macaulay duration as the asset portfolio. a) Find the NPV and Macaulay duration of the liability. b) Calculate the amount invested in each bond. Justify your