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Suppose interest is compounded continuously at rate 2%. A company has a liability of 100,000 of 4-year zero coupon bonds. It wants to Reddington immunise
Suppose interest is compounded continuously at rate 2%. A company has a liability of 100,000 of 4-year zero coupon bonds. It wants to Reddington immunise this liabilities with the purchase of P 3-year zero coupon bonds and Q 5-year zero coupon bonds, where P and Q are to be determined. (a) Derive the two equations P and Q must satisfy. [6] (b) Solve the equations for P and Q. State P and Q to the nearest pound. (c) Explain the meaning of Redding immunisation and how it is used in practice in your own words. Do not use more than 60 words. [10] [6] Suppose interest is compounded continuously at rate 2%. A company has a liability of 100,000 of 4-year zero coupon bonds. It wants to Reddington immunise this liabilities with the purchase of P 3-year zero coupon bonds and Q 5-year zero coupon bonds, where P and Q are to be determined. (a) Derive the two equations P and Q must satisfy. [6] (b) Solve the equations for P and Q. State P and Q to the nearest pound. (c) Explain the meaning of Redding immunisation and how it is used in practice in your own words. Do not use more than 60 words. [10] [6]
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