00:01
Hello students, to immunize the obligation, the portfolio manager needs to construct a portfolio of assets that will exactly match the present value of the payment.
00:09
In this case, present value of obligation is equal to $10 ,000.
00:24
The manager can achieve immunization by combining zero coupon bonds and perpetual perpetuity.
00:32
So, one possible strategy is zero coupon bonds.
00:37
That is, the manager can invest a portion of the funds in zero coupon funds with 3 -year maturity.
00:50
The face value of each bond should be equal to the present value of the payment, which is $10 ,000.
00:56
These bonds will provide a lump sum payment in 3 years.
01:17
Now moving forward to perpetuity, the manager can use perpetuity to provide annual coupon payments indefinitely after 5 years, after the 3 -year period.
01:40
The coupon payment should be match the remaining obligation of $9 ,487 per year...