• An insurance company must make a payment of $162,889 in 10 years. The market interest rate is 5%. The present value of the obligation is $100,000. The company’s portfolio manager wishes to fund the obligation using a four-year zero-coupon bond and perpetuities paying annual coupons.

• How can the manager immunize the obligation. In other words, how can the company set the duration of the portfolio of assets equal to the duration of the liability? What % should the manager invest in the zero-coupon bond and what % should be invested in the perpetuities? Round your answers to two decimal places

Answer rating: 100% (QA)

To immunize the obligation and set the duration of the portfolio of assets equal to the duration of the liability the manager needs to construct a por... View the full answer