Suppose, you are the CEO of a company and you just made a big investment in a
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Question:
Suppose, you are the CEO of a company and you just made a big investment in a new production facility. Your Chief Risk Officer provides you with the following information:
- Your liabilities consist of four $10m payments in years 9, 10, 11, and 12 from now.
- The current interest rate is r = 1.5%.
- Your assets are currently worth $40m.
You want to immunize your liabilities. Using your $40 million in assets, you can invest in 4-year and 12-year zero coupon bonds that pay $100 at maturity. How much do you invest into the 4- and 12-year bond, respectively?
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