A pension fund has to pay out benefits at the end of each of the next 40 years. The
benefits payable at the end of the first year total Ksh1 million. Thereafter, the benefits are
expected to increase at a fixed rate of 3.8835% per annum compound.
a) Calculate the discounted mean term of the liabilities using a rate of interest of 7% per
annum effective.
b) The pension fund can invest in both coupon-paying and zero-coupon bonds with a range
of terms to redemption. The longest-dated bond currently available in the market is a
zero-coupon bond redeemed in exactly 15 years.
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c) Explain why it will not be possible to immunise this pension fund against small changes
in the rate of interest.
d) Describe the other practical problems for an institutional investor who is attempting to
implement an immunisation strategy.