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QUESTION 3 (13 marks) a. A portfolio consists of the following two zero-coupon bonds: Term Face Amount Annual Effective Yield 4 10,000 2.5% 10 6,000
QUESTION 3 (13 marks) a. A portfolio consists of the following two zero-coupon bonds: Term Face Amount Annual Effective Yield 4 10,000 2.5% 10 6,000 6.5% These bonds have been purchased to support a liability that requires a single payment due in 7 years. This combination of assets provides a "fully immunized" portfolio. What is the amount of the liability payment that is due in 7 years? (10) b. What are the limitations of full immunization? [3]
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