KIC000055

# KIC000055 - = Portfolio Duration and Immunization Portfolio...

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= Portfolio Duration and Immunization Example: You must make a balloon payment of\$IO.OOO on your house in 7 years and would like to set aside enough funds to meet this obligation when it arrives. You can buy two zero coupon bonds yielding the market rate of 8% in any amount One has a maturity of 10 years. the other has a maturity of 3 years. (Unfortunately, the market for 7-year zero coupon bonds is very thin and none are currently available.) Note that the present value of your obligation is 10,000/(1.08)1,,· \$5,834.90. Portfolio Duration and Immunization Suppose that right after you buy the bond, interest rates go up to 9"10. The value of the bond you own instantly declines from \$5,83~0 tlt. .......... \ \ A 1:Ji l. \ _ c: "1"\ 1 'V -J,:;)'- • • If rates remain at 9%, the value of your bond in 7 years wiU onlybe \ 'l,<Oql.\\ (l.O'\)?> ~ q, 121.2.~ leavin Portfolio Duration and Immunization • If your investment had a duration equal to that of your obligation (a duration of 7) then your portfolio would be immunized against interest rate swings. In order to immunize

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## This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000055 - = Portfolio Duration and Immunization Portfolio...

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