Question
In: Finance
We have liabilities of $50 million per year for the next 3 years, with payments made...
We have liabilities of $50 million per year for the next 3
years, with payments made at the end of the year. The term
structure of interest rates is given by ?1 = ?2 = ?3 = 8%. We want
to immunize these liabilities by using a 1-year zero coupon bond
with face value of $1 million and a 3-year coupon bond with face
value of $0.1 million, coupon rate 5%, and annual coupon payments.
Assuming the bonds are correctly priced and risk-free.
(a) Show how to immunize the liabilities.
(b) Compare the convexity of the bond portfolio and the
convexity of the liabilities. What can we conclude?
Solutions
Expert Solution
(a)
therefore by putting this amount in each bond we will be able to immunize our liability without any problem.
jeff jeffy answered 1 year agoRelated Solutions
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