My pension plan will pay me $10,000 once a year for a 10-year period. The first payment

Question:

My pension plan will pay me $10,000 once a year for a 10-year period. The first payment will come in exactly 5 years. The pension fund wants to immunize its position.

a. What is the duration of its obligation to me? The current interest rate is 10% per year.

b. If the plan uses 5-year and 20-year zero-coupon bonds to construct the immunized position, how much money ought to be placed in each bond? What will be the face value of the holdings in each zero?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...