Question: Show a step-by-step on how to calculate the duration, please. Assume that a pension fund has an obligation to pay 1 million in 5 years.

Show a step-by-step on how to calculate the duration, please.

Assume that a pension fund has an obligation to pay 1 million in 5 years. It wishes to invest money now in three corporate bonds so that it will meet the obligation. Three corporate bonds are available for the pension fund to invest. Their prices, durations and convexities are calculated in the following table. bond A bond B bond C 9% yield, 100 principle, semi-compounding semi-annual coupon rate maturity price duration convexity 5% 1.5 94.5 2.66 11% 5 107.91 4.02 18.69 9% 7 100.00 5.34 33.21 Calculate bond A's duration. [4] The pension fund constructs an immunized bond portfolio to hedge duration and convexity. The units of bond C that the pension fund invests in are 179. Find out how many unites are invested in bond A and B. [6]

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