Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely,...
60.1K
Verified Solution
Link Copied!
Question
Finance
Pension funds pay lifetime annuities to recipients. If a firm will remain in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $2 million per year to beneficiaries. The yield to maturity on all bonds is 16%. Note: duration of perpetuity is (1+i)/i.
a What is the present value and duration of the pension obligations?
b To fund the liabilities, you decide to choose two types of bonds to invest: the 5-year maturity bonds with coupon rates of 12% (paid annually) and the 20-year maturity bonds with coupon rates of 6% (paid annually). What is the duration of the 5-year coupon bond and 20-year coupon bond?
c To immunize your obligation, what is the asset weight (w) of the 5-year coupon bond and what is the asset weight of the 20-year coupon bond?
d To fully fund and immunize your obligation, how much of each of these coupon bonds you want to hold?
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
