Question
The insurance company where you work for will need to make a payment of $38,974.3 in 7 years. The market interest rate is 10%. You
The insurance company where you work for will need to make a payment of $38,974.3 in 7 years. The market interest rate is 10%. You wish to fund and immunize the obligation using 3-year zero-coupon bonds and perpetuities paying annual coupons.
(a) What is the present value of the obligation? (3 marks)
(b) What is the weighting of each kind of bonds will you hold in your portfolio? (6 marks)
(c) Whats the total face value of the zero-coupon bonds in your portfolio? (3 marks)
(d) Suppose that 1 year has passed, and the interest rate remains at 10%. You want to re-examine the position. Is the portfolio still immunised? If not, what should you do? (6 marks)
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