You are responsible for managing the following liability: 29-year bond, 6.5% annual coupon, when the market interest rate is 5%.

(Please Show work)

- 1. What is the present value of this liability?
- 2. What is the duration of this liability?
- 3. You want to consider immunizing the liability using 14-year and16-year zero-coupon bonds.
- 3.A. What are the investment weights needed for the two bonds?
- 3.B. What are the present values of the two bonds needed to immunize the liability?
- 3.C. What are the face values of the two bonds needed to immunize the liability?
- 3.D. Build a sensitivity table showing the results of changes in interest rates, with the following format:

Weight 3% 4% 5% 6% 7%

Liability

Bond (14 years)

Bond (16 years)

Portfolio sum

4. As an alternative, you want to consider immunizing the liability using 8-year and 30-year zero coupon-bonds.

- 4.A. What are the investment weights needed for the two bonds?
- 4.B. What are the present values of the two bonds needed to immunize the liability?
- 4.C. What are the face values of the two bonds needed to immunize the liability?
- 4.D. Build a sensitivity table showing the results of changes in interest rates, with the following format:

Weight 3% 4% 5% 6% 7%

Liability

Bond (14 years)

Bond (16 years)

Portfolio sum

5. Which strategy (from parts c and d) would you recommend, based solely on price sensitivity?

6 What additional factors might you want to consider before choosing between the two strategies?

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