Question 5 (15 Marks) a) Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble perpetuity. Suppose, therefore, that you are payments of $2 million per year to beneficiaries. The yield to maturity on all bonds is 16% managing a pension fund with obligations to make perpetual Required: If the duration of 5-year maturity bonds with coupon rates of 12% (paid annually) is 4 years and the duration of 20-year maturity bonds with coupon rates of 6% (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? (10 marks) b) How duration is a better measure than maturity when estimating the bond's sensitivity to changes in interest rates. (5 marks) Question 5 (15 Marks) a) Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble perpetuity. Suppose, therefore, that you are payments of $2 million per year to beneficiaries. The yield to maturity on all bonds is 16% managing a pension fund with obligations to make perpetual Required: If the duration of 5-year maturity bonds with coupon rates of 12% (paid annually) is 4 years and the duration of 20-year maturity bonds with coupon rates of 6% (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? (10 marks) b) How duration is a better measure than maturity when estimating the bond's sensitivity to changes in interest rates