A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan?

Question

Quizplus · Accepted Answer

Duration of the perpetuity = 1.04/0.04 = 26 years Duration of the zero = 5 years 15 = (w_z)(5) + (1 − w_z)26; w_z = 52.38%

A Pension Fund Has an Average Duration of Its Liabilities