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Suppose a financial company has 1 million (present value) obligations to Bank A after 1 year, and another 3 million (present value) obligations to Bank
- Suppose a financial company has 1 million (present value) obligations to Bank A after 1 year, and another 3 million (present value) obligations to Bank B after 3 years. The CFO needs to immunize the obligation from interest rate risk. He can only use two bonds now for investments: 1) An annual bond with 9.5% YTM, 9.5% coupon rate and 3 years maturity; 2) A 2-year zero, with 10% YTM. (Keep two decimal places in answers)
- Calculate the price, duration and modified duration for two bonds.
- Assuming YTM on both asset and liability sides are the same, how many bonds and how many zeros should the CFO invest to immunize the obligation from interest rate risk?
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