You manage a pension uid with perpetual annual obligations of $5M. The current YTM is 10%: (a)

You manage a pension fluid with perpetual annual obligations of $5M. The current YTM is 10%:

 

(a) Create a strategy using zero—coupon bonds to immunize your portfolio from interest rate movements.

(b) How many zero-coupon bonds with a par value of $1,000 will you need to purchase to meet your obligations?

(c) What is the convexity of a zero-coupon bond with a duration of 5 years and par value of $1,000? YTM is 10%.

(d) Estimate the new price of the zero coupon bond in part c if YTM decreases by 5% using the bond's duration and convexity.

What is the difference between your estimated price and the actual new price?