The portfolio manager of a pension fund has been assigned a new account; the account is scheduled to pay out $2.0million/year. Since the companies business can be viewed as indefinite, these payments will be made in perpetuity. Generally, the PM has used zero coupon bonds to immunize the risk associated with obligationss of this kind. She is thinking about the 7 year and the 19 year maturity buckets for the zero coupon bonds. Current market rates are 5.9%.

a. What is the mix (% terms) of these two bonds that the PM should deploy to immunize the obligation?

b. What is the market value of each of the zero coupon bonds that are deployed?

c. As a forward thinking PM, she has decided to simulate the impact on the bond portfolio after one year. What is the new composition (5 terms) at the end of the first year? She assumes no change in market rates