Suppose a pension fund must have $10,000,000 five years from now to make required payments to...
Suppose a pension fund must have $10,000,000 five years from now to make required payments to retirees. If the pension wants to guarantee the funds are available regardless of future interest rate changes, it should:
A. Sell a 5-year duration bond so that it matures with a book value of $10,000,000
B. Sell $10,000,000 face value discount bonds with a duration of five years
C. Purchase 7-year, semi-annual coupon bonds that have a duration of five years
D. Purchase 8-year, annual payment bonds that have a dollar duration of $10,000,000
E. None of the options since future interest rates are too unpredictable
Homework Answers
If the pension wants to guarantee the funds are available regardless of future interest rate changes, it should:-
(B) Sell $10,000,000 face value discount bonds with a duration of five years as it will have the required payments and protection against any adverse movements.
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