The pension fund of Glencore Group Pte Ltd has to make a lump sum payment of USD260,000,000 in four years. The pension team calculates the present value of the GIC to be USD 205,700,000. This is the amount they intend to invest today to immunize the lump sum payment. The pension fund is not permitted to use leverage and the current effective duration is 4. The pension fund is building a suitable portfolio and already holds the U.S. government bonds shown in Exhibit 1. Existing Portfolio Bonds Total Market Value Total Dollar Bond Market Price (USD) (USD) Duration Bond A 954,278 5,509,878 102.32 59,113,600 109,630,000 Bond B 94.9 The pension fund must choose a U.S. government bond to complete the immunized portfolio. Required: a) Why would a classical immunization strategy be suitable for the pension fund?

The pension fund of Glencore Group Pte Ltd has to make a lump sum payment of USD260,000,000 in four years. The pension team calculates the present value of the GIC to be USD 205,700,000. This is the amount they intend to invest today to immunize the lump sum payment. The pension fund is not permitted to use leverage and the current effective duration is 4. The pension fund is building a suitable portfolio and already holds the U.S. government bonds shown in Exhibit 1. Existing Portfolio Bonds Total Market Value Total Dollar Bond Market Price (USD) (USD) Duration Bond A 954,278 5,509,878 102.32 59,113,600 109,630,000 Bond B 94.9 The pension fund must choose a U.S. government bond to complete the immunized portfolio. Required: a) Why would a classical immunization strategy be suitable for the pension fund?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 7P

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