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Question: Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a perpetuity. Suppose, therefore, that you are managing a pension fund with obligations to make perpetual payments of $10 million per year to beneficiaries. The yield to maturity on all bonds is 11%. The fund is looking at 5-year maturity zero-coupon bonds and 25-year maturity zero-coupon bonds to immunize its interest rate risk. How much of each of these zero coupon bonds will you want to hold to both fully fund and immunize your obligation?

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