Question

. A small insurance company has liabilities of $5 million in 10 years’ time and $6...

. A small insurance company has liabilities of $5 million in 10 years’ time and $6 million in 11 years’ time. The current interest rate is 5.21% per annum effective. The investment manager plans to buy one 5-year zero coupon bond of maturity value $A million and one 15-year zero coupon bond of maturity value $B million. Find the values of A and B that immunize this portfolio.

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Answer #1

This is a problem of portfolio immunization against small changes in interest rates. For large changes in interest rates, Reddington's condition will not work.

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