CAS Exam 9 Spring 2018, Question 4
Study guide: Exam 9
A company with the following obligations is concerned about interest rate risk.
| Obligation | Amount | Years until due |
|---|---|---|
| 1 | 18,708 | 1.5 |
| 2 | 10,226 | 3.5 |
Only the following securities are available:
- Security A: 2-year bond with a 6% coupon rate, paid annually, selling at par.
- Security B: 4-year zero-coupon bond.
The company is looking to immunize their obligations once over the remaining lifetime of their obligations using securities A and B.
Part a (2 points)
Calculate amounts invested in the immunizing portfolio.
Part b (1.25 points)
Calculate the convexity of the immunizing portfolio.
Part c (0.5 points)
A second portfolio becomes available with the following characteristics:
- Duration equal to duration of obligations
- Convexity = 6.74
Recommend and justify which portfolio the company should invest in.
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