How much of the zero coupon bonds will you want

Reference no: EM132031292

Question: Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $10 million per year to beneficiaries. The yield to maturity on all bonds is 11%. The fund is looking at 5-year maturity zero-coupon bonds and 25-year maturity zero-coupon bonds to immunize its interest rate risk. How much of each of these zero coupon bonds will you want to hold to both fully fund and immunize your obligation?

Reference no: EM132031292

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