client Colin Limited’s pension plan obligation has a duration of 16 and a convexity of 29. Colin’s immunization strategy will use 3 bonds, issued by firms named Eleonore, Frissel, and Greta, respectively. The bonds have the following parameters: Bond Duration Convexity Eleonore 9.00 29.00 Frissel 21.00 35.00 Greta 28.00 56.00 What weights should Ms. Thompson recommend for Colin's Strategy?

client Colin Limited’s pension plan obligation has a duration of 16 and a convexity of 29. Colin’s immunization strategy will use 3 bonds, issued by firms named Eleonore, Frissel, and Greta, respectively. The bonds have the following parameters: Bond Duration Convexity Eleonore 9.00 29.00 Frissel 21.00 35.00 Greta 28.00 56.00 What weights should Ms. Thompson recommend for Colin's Strategy?

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

Chapter11: Bond Pricing And Amortization (bonds)

Section: Chapter Questions

Problem 3R

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You manage a pension fund that will provide retired workers with lifetime annuities. You expect a large number of workers to retire in 8 years. You have the following two bonds to invest in and immunize this portfolio. Inputs Bond A Bond B Settlement date 01-01-2020 01-01-2020 Maturity date 01-01-2025 01-01-2040 Coupon rate 0.025 0.0000 Face Value $1,000.00 $1,000.00 Coupons per year 1 1 Obligation Time to Payout 8 Payout $50,000,000 Initial Yield to Maturity 0.0750 Required: Using any necessary data above, calculate the Present value and Macaulay Duration of the obligation. Assume annual payments. Then calculate the Macaulay Duration and the Modified Duration for each bond. Use this information to immunize the portfolio. Then, re-immunize the portfolio 1 year later using the new yield.
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