Question: Using a 2-year zero-coupon bond and a perpetuity, design an immunization strategy for the following liability: Your firm has sold GIC's (guaranteed investment contracts)

Using a 2-year zero-coupon bond and a perpetuity, design an immunization strategy

Using a 2-year zero-coupon bond and a perpetuity, design an immunization strategy for the following liability: Your firm has sold GIC's (guaranteed investment contracts) which promise to pay $4 million per year for 3 years, with the first payment due 4 years from today. Assume the yield curve is flat at an 8% annual rate and that the perpetuity pays an annual coupon. A. What is the duration of the liability? B. How much should you invest in the zero and in the perpetuity?

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