Question
You have an obligation with a Present Value of $50000.00 and a duration of 5.20 years. There are 2-zero coupon bonds that you might use
You have an obligation with a Present Value of $50000.00 and a duration of 5.20 years.
There are 2-zero coupon bonds that you might use to duration-immunize a portfolio. A short-term bond with a maturity of 3 years and a long-term bond with a maturity of 19 years.
The prevailing interest rate on all bonds and your obligation is constant at 6.80%.
You will buy both the short-term bond and the long-term bond to duration immunize your portfolio.
What amount of money should you spend on the long-term bond to duration immunize your obligation (ie: what present value of the long-term bond will you purchase)
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