10. A pension plan is obligated to make disbursements of $3.3 million, $40 milli

Question

10. A pension plan is obligated to make disbursements of $3.3 million, $40 million, and $3.3 million at the end of each of the next three years. respectively. The annual interest rate is 10%. If the plan wants to fully fund and immunize its position. how much of its portfolio should it allocate to one-year zero-coupon bonds and perpetuities. respectively, if these are the only two assets funding the plan? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Portfolio Investment in one-year zero-coupon bonds Investment in perpetuity b. A bond currently sells for $1,050, which gives it a yield to maturity of 6%. Suppose that if the yield increases by 25 basis points, the price of the bond falls to $1,025. What is the duration of this bond? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Explanation / Answer

PART 1

Time until payment Payment Payment
Discounted
At 10% Weight 1 3.3 0.90909 0.311321 0.311321 2 4 0.82645 0.377358 0.754717 3 3.3 0.75131 0.311321 0.933962 10.6 1 2.0

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