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Pleasant View Nursing Home has decided to immunize its portfolio against interest rate and reinvestment
rate risk by buying a bond that has a duration equal to the years until the funds will be needed
(approximately ten years from today). The home is considering a 20-year, 9 percent annual coupon bond
bought at its par value of $1,000.
a. What is the duration of this bond?
b. If the nursing home purchases $4,224,000 worth of this bond, what would be the value of the bonds at the
end of the duration period if interest rates fall to 7 percent immediately after the purchase and remain at
that level? If interest rates rise to 12 percent?
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Pleasant View Nursing Home has decided to immunize its portfolio against interest rate and
reinvestment
rate risk by buying a bond that has a duration equal to the years until the funds will be...