27UIUC%20FIN%20300%20Duration%20Matching%20Immunization%20Example%201-3%20FA09

27UIUC%20FIN%20300%20Duration%20Matching%20Immunization%20Example%201-3%20FA09

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
UNIVERSITY OF ILLINOIS College of Business - Department of Finance - Finance 300 (Financial Markets) Professor James Jackson Example Question #1 Question: You are asked to set up a trust that has a liability schedule of cash outflows of $500,000 per year for four years. The two bond issues available to meet the cash out flow payments are quoted with the coupon rate, duration, and price information in the table below. How do you immunize the portfolio? Answer: Follow the eight immunization steps. 1. Calculate the duration of the liabilities. Liability (Time Periods) Cash Flow (CF$) PV (C$) Duration (D i ) 2 $500,000.00 $471,297.95 0.54517 Market Rate (YTM %) 4 $500,000.00 $444,243.52 1.02775 6.00% 6 $500,000.00 $418,742.13 1.45313 Risk Free Rate % 8 $500,000.00 $394,704.62 1.82629 3.00% (∑ PVCF $) = $1,728,988.22 ∑/2 = Duration (Years) 2.4262 Bond #1 Coupon Rate Bond #1 Duration Bond #1 Price Bond #2 Coupon Rate Bond #2 Duration Bond #2 Price 4.00% 2.00
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/10/2011 for the course FIN 300 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

Page1 / 3

27UIUC%20FIN%20300%20Duration%20Matching%20Immunization%20Example%201-3%20FA09

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online