The term structure of interest rates is flat at 8%. You want to immunize a liability...

 

Transcribed Image Text:

The term structure of interest rates is flat at 8%. You want to immunize a liability of $1,000 maturing in 7 years. To do so you may invest in a combination of the following a perpetuity with a nominal face value of $100 and a coupon rate of 10% a three-year zero-coupon bond with a face value of $200 a. How much would you invest in each instrument today? Ert= (1 Hint: Ert (1-r) Hint: The duration of a perpetuity is given by D 1+y Y b. How would your weights have changed after one year has passed (as- suming that the term structure of interest rates remains the same)? The term structure of interest rates is flat at 8%. You want to immunize a liability of $1,000 maturing in 7 years. To do so you may invest in a combination of the following a perpetuity with a nominal face value of $100 and a coupon rate of 10% a three-year zero-coupon bond with a face value of $200 a. How much would you invest in each instrument today? Ert= (1 Hint: Ert (1-r) Hint: The duration of a perpetuity is given by D 1+y Y b. How would your weights have changed after one year has passed (as- suming that the term structure of interest rates remains the same)?

Answer rating: 100% (QA)

a To immunize the liability we want the duration of our portfolio to match t... View the full answer