A Pension Fund Has an Average Duration of Its Liabilities

question 17

Multiple Choice

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?

• A) 52.38%
• B) 48.38%
• C) 33.58%
• D) 25.48%

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Definitions:

Deposit Insurance

A protection scheme that guarantees a depositor's money in the event of a bank failure, up to a certain limit.

Big Banks

Large financial institutions that hold a significant portion of a country's total banking assets.

Moral Hazard

A situation in which one party engages in risky behavior knowing that it is protected against the consequences, often because another party bears the cost of those actions.

Deposits Insured

A guarantee by a government or private entity that deposits in banks and financial institutions will be protected up to a certain limit in case of bank failure.