A life insurance company. Our Life, has relatively predictable obligations. It needs to pay $100 million in 5 years and $200 million in 10 years. The current market interest rate is 5%. The company wants to offset the interest rate risk of the obligations with a zero-coupon bond that mature in 8 years and perpetuity with annual payment at the current interest rate.

How much would you invest to archive immunisation in each of the two assets.

Employees of ourlife are discussing the merit of adding active management of the bond portfolio to the investment strategy. Discuss the argument for and against adding this strategy.

Answer rating: 100% (QA)

SOLUTION To immunize the life insurance companys obligations we need to construct a portfolio of bonds that will generate sufficient cash flows to mee... View the full answer