Suppose that you manage a pension fund with obligations to make perpetual payments of $60,000 per...

Transcribed Image Text:

Suppose that you manage a pension fund with obligations to make perpetual payments of $60,000 per year to beneficiaries, and you plan to fund the obligation fully by using 5-year and 20-year maturity zero-coupon bonds. The current interest rate is 6% for all maturities. (a) What are the present value and the duration of the obligations to make perpetual payments of $60,000? (1 mark) Click and type your answer. (b) How much is the market value of each of the two zero-coupon bonds in the bond portfolio that is necessary to fund the plan if you decide to take an immunized position? (2.5 marks) Click and type your answer. (b) Define immunization and discuss in detail why a bond manager would immunize his or her bond portfolio. (2.5 marks) Click and type your answer. Suppose that you manage a pension fund with obligations to make perpetual payments of $60,000 per year to beneficiaries, and you plan to fund the obligation fully by using 5-year and 20-year maturity zero-coupon bonds. The current interest rate is 6% for all maturities. (a) What are the present value and the duration of the obligations to make perpetual payments of $60,000? (1 mark) Click and type your answer. (b) How much is the market value of each of the two zero-coupon bonds in the bond portfolio that is necessary to fund the plan if you decide to take an immunized position? (2.5 marks) Click and type your answer. (b) Define immunization and discuss in detail why a bond manager would immunize his or her bond portfolio. (2.5 marks) Click and type your answer.

Answer rating: 100% (QA)

SOLUTION a The present value of the perpetual payments can be calculated using the perpetuity formula Present Value Annual Payment Interest Rate Given ... View the full answer