A Pension Fund Has an Average Duration of Its Liabilities

question 2

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%
• B) 48%
• C) 33%
• D) 25%

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Definitions:

Price

The amount of money or goods required to purchase a product or service.

Pure Monopolist

A market structure where a single seller controls the entire market supply of a product or service with no close substitutes, allowing them to set prices.

Monopoly Price

The price set by a monopoly, typically higher than in competitive markets, due to the absence of competition.

Economic Profits

Profits exceeding the opportunity costs of all resources used, indicating a return above the normal competition level.