Sanders, CFA, is a fixed income portfolio manager at an insurance company. She has an obligation...

Transcribed Image Text:

Sanders, CFA, is a fixed income portfolio manager at an insurance company. She has an obligation to pay $150.0 million in 15 years and she wants to immunise this obligation. The yield to maturity of a 15-year zero coupon bond is 6.5% but there are insufficient numbers of these bonds available in the open market. She has, however, identified the following three non-callable semi-annual pay bonds as suitable hedging instruments to immunise the obligation: Price Coupon Yield 81.59 6.0% 8.0% 124.35 7.0% 5.0% 135.75 10.0% 6.0% (a) What strategy should Sanders use to immunise her obligation? Fully explain your answer with graphs, where appropriate. State any assumptions. (b) (14 marks) Based on your answer to part (a), above, how many securities must Sanders trade to immunise the obligation. (16 marks) (Total: 35 marks) Sanders, CFA, is a fixed income portfolio manager at an insurance company. She has an obligation to pay $150.0 million in 15 years and she wants to immunise this obligation. The yield to maturity of a 15-year zero coupon bond is 6.5% but there are insufficient numbers of these bonds available in the open market. She has, however, identified the following three non-callable semi-annual pay bonds as suitable hedging instruments to immunise the obligation: Price Coupon Yield 81.59 6.0% 8.0% 124.35 7.0% 5.0% 135.75 10.0% 6.0% (a) What strategy should Sanders use to immunise her obligation? Fully explain your answer with graphs, where appropriate. State any assumptions. (b) (14 marks) Based on your answer to part (a), above, how many securities must Sanders trade to immunise the obligation. (16 marks) (Total: 35 marks)