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A financial institution's liability looks like a zero-coupon bond. The institution has to pay $1,464,573 in five years. The current market value of...
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A financial institution's liability looks like a zero-coupon bond.

The institution has to pay $1,464,573 in five years. The current market value of the liability is $1 million. The institution would like to immunize its exposure to the interest rate risk by matching the Macaulay durations. Therefore, this institution plans to invest $1 million in one of the following two bonds and hold it for five years. Both bonds pay coupons annually. Each coupon payment will be reinvested in the same bond immediately after the coupon payment. Which bond should the investor buy? Why?


BOND Term to maturity (years) coupon rate (% pa) YTM (% pa) par
A 8 4 4 100
B 6 7.93 7.93 100

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Subject: Business, Finance

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