SOA Exam FM Sample Question 108
Study guide: Exam FM-2
You are given the following information about a company's liabilities:
- Present value: 9697
- Macaulay duration: 15.24
- Macaulay convexity: 242.47
The company decides to create an investment portfolio by making investments into two of the following three zero-coupon bonds: 5-year, 15-year, and 20-year. The company would like its position to be Redington immunized against small changes in yield rate.
The annual effective yield rate for each of the bonds is 7.5%.
Determine which of the following portfolios the company should create.
- A) Invest 3077 for the 5-year bond and 6620 for the 20-year bond.
- B) Invest 6620 for the 5-year bond and 3077 for the 20-year bond.
- C) Invest 465 for the 15-year bond and 9232 for the 20-year bond.
- D) Invest 4156 for the 15-year bond and 5541 for the 20-year bond.
- E) Invest 9232 for the 15-year bond and 465 for the 20-year bond.
Answer this question and see the worked solution
Concepts tested
- Immunization
- Duration
- Bonds
- Portfolio
- Asset-Liability Portfolio
- Duration Matching
- Redington Immunization
- Convexity