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Pension funds pay lifetime annuities to recipients. If a firm expects to remain
Assume you have a one-year investment horizon and are trying to choose among t
September 15, 2020?1 = (?^?U/?^?N)aVProve that this relation which was used by Gibbs to define ?1
September 15, 2020Pension funds pay lifetime annuities to recipients. If a firm expects to remain in business indefinitely its 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%. (a) If the duration of 5-year maturity bonds with coupon rates of 12% (paid annually) is 4 years and the duration of 20-year maturity bonds with coupon
rates of 6% (paid annually) is 11 years how much of each of these coupon bonds (in market value) will you want to hold to both fully fund and immunize
your obligation? (b) What will be the par value of your holdings in the 20-year coupon bond?
