Convexity of assets is greater than convexity of liabilities

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Reference no: EM131908898

Suppose that a company receives a payment (asset) of $1100 at time t-1 and $1,331 at time 3.. Suppose they have liabilities of $2,420 at time t-2. At an annual effective rate of interest of 10%, the present value of assets and liabilities are equal and the duration of the assets equals the duration of the liabilities. Determine the maximum rate of interest on which the convexity of assets is greater than the convexity of liabilities (i.e find the maximum effective rate for which the payment streams are immunized.) Hint: you will need to find the "price functions" as functions of i and take derivatives.

Reference no: EM131908898

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