A pension fund faces a promised outflow of $5 million in 6 years. Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation. a. What must be the proportions ((W7, W6) or (Weight(A), Weight(B)) of the two bonds in this 2-security portfolio to immunize it against changes in interest rates? b. What is the yield to maturity for the immunized portfolio? c. How much needs to be invested in each bond to build an immunized portfolio with an expected value of $5 million in 6 years? d. Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?
A pension fund faces a promised outflow of $5 million in 6 years. Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation.
a. What must be the proportions ((W7, W6) or (Weight(A), Weight(B)) of the two bonds in this 2-security portfolio to immunize it against changes in interest rates?
b. What is the yield to maturity for the immunized portfolio?
c. How much needs to be invested in each bond to build an immunized portfolio with an expected value of $5 million in 6 years?
d. Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?
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