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How can the manager immunize the obligation

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Reference no: EM132000609

Consider the following problem:

An insurance company must make a payment of £19,487 in 7 years. The market interest rate is 10%, so the present value of the obligation is £10,000. The company's portfolio manager wishes to fund the obligation using 3-year zero-coupon bonds and perpetuities paying annual coupons.

  1. How can the manager immunize the obligation?

Suppose that 1 year has passed, the interest rate remains at 10%. The portfolio manager needs to re- examine her position. Is the position still fully funded?

Reference no: EM132000609

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