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The following bonds and liabilities are given: • Bond A: A zero-coupon bond with a face value of $100 and a time to maturity of 3 years. • Bond B: A zero-coupon bond with a face value of $100 and a time to maturity of 12 years. • Liability X: A one-time liability maturing in 4 years with the present value of $100. • Liability Y: A one-time liability maturing in 8 years with the present value of $100. Suppose you have both liabilities X and Y and want to immunize your liabilities using bonds A and B. What would be the weights of two bonds in your immunizing bond portfolio? Please round your calculation to the nearest 2nd decimal. Select one: A. 30% in Bond A and 70% in bond B B. 67% in Bond A and 33% in bond B C. 50% in Bond A and 50% in bond B D. 33% in Bond A and 67% in bond B E. 70% in Bond A and 30% in bond B

Respuesta :

Answer:

A. 30% in Bond A and 70% in Bond B

Explanation:

There are two liabilities X and Y. The X liability is due in 4 years which can be paid when the Bond A is matured. The maturity time of Bond A is 3 years. To find this duration of the bond is calculated to find immunizing bond portfolio.

Duration = D / (1 + y)

Duration of bond A is 2.56 and Bond B is 7.24

If we invest 30% in Bond A, the liability X can be offset by the redemption and liability Y will be offset when the Bond B matures.

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