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Use a 1-year, 3% coupon (annual), $1000 face value bond and a 6 year 8% coupon (annual), $1000 face value bond to create an immunized
Use a 1-year, 3% coupon (annual), $1000 face value bond and a 6 year 8% coupon (annual), $1000 face value bond to create an immunized portfolio that will be worth $ 1 000 million in 3 years. Assume the annual discount rate is 3% for both bonds. Check to see if your portfolio is immunized by showing how much money your portfolio will be worth in 3 years if interest rates rise to 4% at the beginning of year 2 (annual rates of 3%, 4%, 4%, 4%, 4%, 4%). Alternatively, show what your portfolio would be worth in 3 years if rates rise to 10% at the beginning of year 2 but return to 4% at the beginning of year
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