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My pension plan will pay me$5,000 once a year for a 10 -year period. The first...

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Finance

My pension plan will pay me$5,000 once a year for a 10 -yearperiod. The first payment will come in exactly five years. Thepension fund wants to immunize its position.

a. What is the duration of its obligation to me? The currentinterest rate is 8% per year.

b.If the plan uses 3-year and 30-year zero-coupon bonds toconstruct the immunized position, how money ought to be placed ineach bond?

c.What will be the face value of the holdings in each zero?

Answer & Explanation Solved by verified expert
4.3 Ratings (881 Votes)
Part a Year Cash flows Disc rate Disc Factor PV of CF t x PV t CF r DF 1 rt CF x DF 5 5000 8 06806 3403 17015 6 5000 8 06302 3151 18905 7 5000 8 05835 2917 20422 8 5000 8 05403 2701 21611 9 5000 8 05002    See Answer
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