You plan to invest in fixed-income securities to satisfy a cash outflow of $1 million in 5 years. You want to implement
Posted: Thu Apr 28, 2022 1:30 pm
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. [6
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]
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. [6
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]