a. The present value of the fund’s obligation is $800,000/.08 = $10 million. The duration is 13.5 years. Therefore, the fund should invest $10 million in zeros with a 13.5-year maturity. The face value of the zeros will be

b. When the interest rate increases to 8.1%, the present value of the fund’s obligation drops to 800,000/.081 = $9,876,543. The value of the zero-coupon bond falls by roughly the same amount, to The duration of the perpetual obligation falls to 1.081/.081 = 13.346 years. The fund should sell the zero it currently holds and purchase $9,876,543 in zero-coupon bonds with maturity of 13.346 years.

Save your time - order a paper!

Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlines

Order Paper Now
"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"