Your company will owe a single payment of $20 million dollars to a pension fund in 10 years. The current yield to maturity for investment grade bonds with 10 years to maturity is 7 percent. What is the best method to immunize this portfolio? Buy bonds with:

Question

Quizplus · Accepted Answer

According to immunization theory, we should match the duration of the bond portfolio with the duration of the pension fund payment. Therefore, buying bonds with a duration of 10 years is the best method to immunize the portfolio. None of the other options (average coupon rate, maturity, yield to maturity, and face value) necessarily match the duration of the payment.

Your Company Will Owe a Single Payment of $20 Million