A corporate pension plan has to make the following payments over the next few years:
Year | 1 | 2 | 3 | 4 |
Amount ($ million) | 27 | 31 | 37 | 45 |
The appropriate interest rate is 7%.
What is the present value of the liability (in $ million)?
What is the duration of the liability?
What is the duration of a perpetuity if the yield is 7%?
The fund wants to immunize its interest rate risk by investing in a perpetuity and a 1-year zero coupon bond. To do so, how much should it invest in the perpetuity (in $ million)?
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