Question
You manage a pension uid with perpetual annual obligations of $5M. The current YTM is 10%: (a) Create a strategy using zerocoupon bonds to immunize
You manage a pension fluid with perpetual annual obligations of $5M. The current YTM is 10%:
(a) Create a strategy using zero—coupon bonds to immunize your portfolio from interest rate movements.
(b) How many zero-coupon bonds with a par value of $1,000 will you need to purchase to meet your obligations?
(c) What is the convexity of a zero-coupon bond with a duration of 5 years and par value of $1,000? YTM is 10%.
(d) Estimate the new price of the zero coupon bond in part c if YTM decreases by 5% using the bond's duration and convexity.
What is the difference between your estimated price and the actual new price?
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Principles of Corporate Finance
Authors: Richard Brealey, Stewart Myers, Franklin Allen
13th edition
1260013901, 1260565553, 978-1260013900
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