1. Business
  2. Finance
  3. a financial institutions liability looks like a zerocoupon bond the...

Question: a financial institutions liability looks like a zerocoupon bond the...

Question details

 
A financial institution’s liability looks like a zero-coupon bond. The institution has to pay $1,464,573 in five years. The current market value of the liability is $1 million. The institution would like to immunize its exposure to the interest rate risk by matching the Macaulay durations. Therefore, this institution plans to invest $1 million in one of the following two bonds and hold it for five years. Both bonds pay coupons annually. Each coupon payment will be reinvested in the same bond immediately after the coupon payment. Which bond should the investor buy? Why?

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution