Calcuate the dollar amounts you need to put in each bond

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Reference no: EM132015817

Suppose you are a pension fund manager and you have a three year obligation of $120 million. You would like to dedicate the amount of money needed for that today and hope you can make rate of return of 6% on it.

A.) Assuming you can find a three year zero with 6% rate of return, how muich money do you need to dedicate today in order to have $120 million in three years?

B.) Now assume you can't find a three year zero with 6% YTM, but you do find the following bonds with 6% YTM:

A five year, 8% semi-annual bond

A four year, 9% semi-annual bond

A one year zero bond

They are all fairly priced. What bonds are the best ones to choose for a dedicated, immunized portfolio?

C.) Calcuate the dollar amounts you need to put in each bond and the number of bond of each you need to buy. (Note: This part is the "meat" of the whole exercise where you need to do most of the calcuations.)

Reference no: EM132015817

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