Concept Applied - Bond Immunization
Bond Immunization
Weighted Average Duration of Asset = Weighted Average Duration of Liability
In this case, Weighted Average Duration of Bond must be equal to Weighted Average Duration of Liabilities.
Calculation of Weighted Average Duration of Bond
Formula for Calculation of Duration of Security 1:
Duration = (nt=1 t*c/(1+i)^t + n*M/(1+i)^n)/ P
n = no. of cash flows
t = time to maturity
i = required yield
M = Maturity Value
P = Price of Bond
Security 1 - Based on above Duration of Security 1 = 10.72
Security 2 - Based on above Duration of Security 2 = 4.48
Weighted Average Duration of Liabilities
= (1,00,000 * 3 + 2,00,000 * 5 + 3,00,000 * 10) / (1,00,000 + 2,00,000 + 3,00,000) = 7.17
Hence Weights of Security 1 = 43.54% & Weight of Securiy 2 = 56.46%.
Hence Answer is Option 5
100 19 00 8 Security #1 is a 15-year bond with a face value of $1,000...
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