1. Suppose a financial company has 1 million (present value) obligations to Bank A after 1 year, and another 3 million (present value) obligations to Bank B after 3 years. The CFO needs to immunize the obligation from interest rate risk. He can only use two bonds now for investments: 
2. 1) An annual bond with 9.5% YTM, 9.5% coupon rate and 3 years' maturity; 
3. 2) A 2-year zero, with 10% YTM. (Keep two decimal places in answers)

a. Calculate the price, duration and modified duration for two bonds.

b. Assuming YTM on both asset and liability sides are the same, how many bonds and how many zeros should the CFO invest to immunize the obligation from interest rate risk?

Answer rating: 100% (QA)

a Let s start by calculating the price duration and modified duration for the two bonds 1 Annual Bond with 9 5 YTM 9 5 Coupon Rate and 3 Years Maturity Coupon Payment per Year 9 5 Face Value 0 095 100 View the full answer