Design for small pension fund a bond portfolio

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Reference no: EM131820884

You are to design for a small pension fund a bond portfolio to fund a $10 million obligation due in 4 years. The fund managers would like to use a 2-year zero along with an 8-year zero to fund the obligation. Currently, the yield curve is flat at around 5% for all maturities. a. Design a bond portfolio that will protect the pension fund from fluctuations in interest rates. b. Suppose that immediately after you set up the portfolio, the yield curve shifts to 6% at all maturities. Calculate what you expect the future value of the investment in the two bonds to be in year 4. Do you exactly meet the obligation of the fund? Explain any difference. c. What are individual future values for the 8-year zero as well as 2-year zero after the 1% increase in yield? d. What are the individual present values needed to fund the pension obligantion for the 8-year zero as well as 2-year zero after the 1% increase in yield? e. Is there any change to the $10 million obligation, if so what is it?

Reference no: EM131820884

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