Cash flow matching vs immunizationa pension manager must, Ask an Expert

Finance

Cash flow matching vs. Immunization.

A pension manager must fund a series of payments. The payments and the prices of zero coupon bonds associated with the same dates are:

Date (Years): 0.5/1.0/1.5/2.0

Payment: 1000/ 1200/ 2500/ 1500

Zero Price: 99.50/98.00/97.00/96.00

(a) Compute the present value of the pension fund's liabilities, by setting up a portfolio of zero coupon bonds that delivers exactly the cash flows required, and calculating its price.

(b) Use the durations of the zeros to compute the duration of the matching portfolio, and hence of the liabilities.

(c) Suppose the pension manager decided to fund the payments using a combination of only 0.5- and 2-year zeros. What combination of these two instruments has the same value and duration as the fund's liabilities?

(d) Assume now the 2-year continuously compounded spot rate rises to 3%, while the other spot rates are unchanged. Which of the two portfolios would suffer more from the increase in this rate: the cash-flow matched portfolio (obtained in (a)) or the duration-matched portfolio (obtained in (c))? Compute the new values of the two portfolios.

View complete question

Financial Management, Finance

Category:- Financial Management
Reference No.:- M92818359

Have any Question?Write your Review or question?

Related Questions in Financial Management

Scenariobig data is everywhere and various businesses

Scenario Big Data is everywhere and various businesses around the world are driven by Big Data. However, while some businesses rely on Big Data for organizational decision making, this does not mean that the implications ...

Assignment objectives amp requirements1 to create a new

Assignment Objectives & Requirements: 1. To create a new E-commerce business, which is located in the Kingdom of Saudi Arabia, which include the followings: a. Introduction about your business. b. Product and type of ser ...

Case analysis questions1 explain in 175 words what makes a

Case Analysis Questions 1. Explain in 175 words what makes a company a “multinational corporation”. 2. Complete the chart in a total of 350 words using 3 to 5 examples of multinational corporations. 3. Reading through th ...

The following examination is due no later than 9 am monday

The following examination is due no later than 9 AM Monday, October 22nd. You are to email me the exam in an XLSX file named after yourself and containing your section. For example, if your name is Leslie King, the file ...

Reflection papernbsp instructionsas you continue on your

Reflection Paper : Instructions As you continue on your quest for academic success, it is important to share your knowledge with others. In fact, you have been asked to provide advice to future students on academic inte ...

Assignment -complete a research topic and prepare a

Assignment - Complete a research topic and prepare a write-up, and a presentation. SECTION A: Financial Analysis and Pricing Select a portfolio of five firms from the industry of your choice. Please then see me for appro ...

Company x is an american manufacturing company getting

Company X is an American manufacturing company getting ready to start selling its products in Mexico. You are the manager of a team tasked with assessing the potential risks to the company as it gets ready to expand to a ...

Please respond to the following discussion not an essay

Please respond to the following: {Discussion, NOT an Essay. Under 350 WORDS} a) Suggest one key factor that a financial manager should evaluate when determining whether to invest in stocks or bonds. Provide support for y ...

Financial management assignment questions -1 explain why

Financial Management Assignment Questions - 1. Explain why companies should discount projects using the cost of equity. When should they use the WACC instead? When should they use either? 2. Given the following informati ...

Case 1 hedging currency risks at aifsinstructionsplease

Case 1: Hedging Currency Risks at AIFS Instructions: Please download the case and accompanying material from the HBS link that I provided on Canvas. For your analysis of the case, I am asking you put yourself in the shoe ...

4,153,160 Questions Asked
13,132 Experts
2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Recent Questions

Ask Financial Management Expert