One-year zero-coupon bonds and perpetuities

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Reference no: EM131546638

1. A pension plan is obligated to make disbursements of $3.5 million, $4.0 million, $4.5 million, and $5.0 million at the end of each of the next four years, respectively. Find the duration of the plan’s obligations if the interest rate is 7% annually.

2. If the plan from the question above wants to fully fund and immunize its position, how much of its portfolio should it allocate to one-year zero-coupon bonds and perpetuities, respectively, if these are the only two assets funding the plan?

Please show work and write out answers.

Reference no: EM131546638

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