Question
The liabilities duration of XYZ fund is equal to 15 years. XYZ wants to immunize itself against the volatile interest rate. The CEO thinks that
The liabilities duration of XYZ fund is equal to 15 years. XYZ wants to immunize itself against the volatile interest rate. The CEO thinks that they should buy a 5-year zero coupon bond and perpetual bonds yielding 4%. However, the CFO affirms that they should buy a 4-year zero coupon bond and perpetual bonds yielding 5%. Which of the following statements is TRUE? *
a. According to the CEOs viewpoint, the weight of the zero-coupon bonds must be equal to 52.38% while according to the CFOs viewpoint the weight of the perpetuities must be equal to 47.62%
b. According to the CEOs viewpoint, the weight of the zero-coupon bonds must be equal to 64.71%, while that of the perpetuities must be equal to 35.29%
c. According to the CFOs viewpoint, the weight of the perpetuities must be equal to 64.71%, while according to the CEOs viewpoint their weight must be equal to 52.38%.
d. According to the CEOs viewpoint the weight of the perpetuities must be equal to 47.62%, while according to the CFOs viewpoint their weight must be equal to 64.71%.
e. None of the above
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