TMA Template

Question 1

1) Ifthebinomialtreeiscorrectlycalibrated,itshouldgivethesamevalueforanoption-freebondasusingthespotcurve(parcurve)usedtocalibratethetree.

2) Ifafirmscreditratingremainsstableovertime,thecorrelationitsdefaultprobabilityoverthebusinesscyclewouldbereduced.

3)Zero coupon bonds (ZCB) have duration equals to its maturity. Hence, ZCBs price sensitivity to interest rate change is the same regardless of the interest rates level.

Question 2

Contingent Immunisation Strategy is to invest in a bond such that:

- ???? Its duration (Macaulay) matches the investment horizon, and

???? -Its present value matches the present value of the target value.

Given the current available return is 6%. The required terminal value (the target liability) is

$2,054.46 over a 10-year investment horizon (based on yearly compounding).

Construct a bond that would immunise this target liability. Compute and verify your strategy indeed immunised the liability when the market interest rates are 3%, 6% and 9%.

Help: Use the following closed form for bond price and its Macaulay Duration.

See attachment

Can assist with q2 as the answer i have do not give a immunization effect even though according to the formule