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A pension fund faces a promised outflow of $5 million in 6 years.  Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation.      d.  Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?

A pension fund faces a promised outflow of $5 million in 6 years.  Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation.      d.  Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?

Survey of Accounting (Accounting I)
Survey of Accounting (Accounting I)
8th Edition
ISBN:9781305961883
Author:Carl Warren
Publisher:Carl Warren
Chapter11: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 11.18E
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A pension fund faces a promised outflow of $5 million in 6 years.  Its managers plan to dedicate a portfolio comprised of the following two bonds to meet this obligation. 

 

 

d.  Suppose that it is now 3 years later and that there has been a parallel increase in interest rates of 2%. Explain how immunization at least partially protects this portfolio. That is, what are the sources of losses and gains associated with each of the bonds caused by the increase in interest rates? How do they offset each other?

Coupon Term-to Bond Rate YTM Maturity Duration Price A 0.07 0.03 3 years 2.8 111.30 B 0.06 0.05 20 years 12.6 112.50
Transcribed Image Text:Coupon Term-to Bond Rate YTM Maturity Duration Price A 0.07 0.03 3 years 2.8 111.30 B 0.06 0.05 20 years 12.6 112.50
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