Question
Suppose that you have a liability of $110 million must be met in 1 year. Suppose that you do not adopt an immunization strategy and
Suppose that you have a liability of $110 million must be met in 1 year. Suppose that you do not adopt an immunization strategy and invest $100 million on a bond that pays out coupon payments annually, has a coupon rate of 8%, has a life of 20 years, and has a YTM of 10%. If the YTM does not change over the next year, can you meet the obligation? If not, what is the gap between your investment and liability in 1 year? If the YTM goes from 10% to 11% immediately after your investment and then stays at the same rate for the rest of the year, can you meet the obligation? If not, what is the gap between your investment and liability in 1 year?
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