Question
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)
a. Calculate the price, duration and modified duration for two bonds.
b. 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?
Step by Step Solution
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a Lets start by calculating the price duration and modified duration for the two bonds 1 Annual Bond with 95 YTM 95 Coupon Rate and 3 Years Maturity Coupon Payment per Year 95 Face Value 0095 1000 95 ...
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Fundamentals Of Corporate Finance
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
5th Edition
0135811600, 978-0135811603
