A pension fund must make a payment of 50,000 p.a. at the end of each of the

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Question:

A pension fund must make a payment of €50,000 p.a. at the end of each of the next 8 years. The rate of interest applying is 5% p.a. effective.

a) Show that the present value of these liability payment is €323.16 and that the Discounted Mean Term of these liability payment is 4.24 years. [4] The fund invests in two zero coupon bonds of term 3 and 8 years in order to try and match the liability position.

b) Calculate the nominal amounts of both bonds which must be held such that their present value and duration equal that of the liability payments at an interest rate of 5% p.a. effective. [4]

c) Without doing any further calculations, comment on whether Redington Immunization will be held.