Question 4 (20 Marks) You plan to invest in fixed-income securities to satisfy a cash outflow of $1 million in 5 years.

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Question 4 20 Marks You Plan To Invest In Fixed Income Securities To Satisfy A Cash Outflow Of 1 Million In 5 Years 1 (57.79 KiB) Viewed 21 times

Question 4 (20 Marks) You plan to invest in fixed-income securities to satisfy a cash outflow of $1 million in 5 years. You want to implement the target date immunization strategy to eliminate the interest rate risk over your investment horizon. Specifically, your fixed-income portfolio will consist of Bond C, which has a coupon of 8% per year, paid semi-annually, with a maturity of 2 years and Bond D, which is a 10-year zero- coupon bond. Both bonds have a yield to maturity of 8% per year and a par value of $1000. Required: (1) Calculate the duration for Bond C and D. 16 marks) (2) How would you achieve the target date immunization over the 5-year period? [6 marks (3) Discuss why your immunization strategy can be effective. What kind of risk will you face if you invest only in Bond C? And what if you only invest in Bond D? [6 marks (4) What would be an alternative to the immunization without portfolio rebalancing? [2 marks]