Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. Thesecond bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompsonwants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension againstinterest rate risk.

For the consol bond:V_2 = V_T - V_1 = 150 - 60 = $90\) million Therefore, to immunize the pension…

Answered: Client Billy Mack Co. wants to immunize…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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