Extracted text: Liability payments of 100 each are due to be paid in 2, 4 and 6
years from now....

Question

Extracted text: Liability payments of 100 each are due to be paid in 2, 4 and 6
years from now. Asset cashflow consists of A in 1 year and A, in
5 years. The yield for all payments is 10%. An attempt is made to
have the asset cash flow immunize the liability cashflow by
matching present value and duration.
7.2.7
(a) Find A and Ag.
(b) Determine whether or not the conditions for Redington
immunization are satisfied.

Prince · Accepted Answer

Part 1. 
Present value of liabilities = 100/(1+10%)2 + 100/(1+10%)4 + 100/(1+10%)6 = 207.393
Duration of liabilities = 
(2*100/(1+10%)2 + 4*100/(1+10%)4 + 6*100/(1+10%)6)/207.3934 
= 3.747 years
PV of assets = A1/(1+10%)1 + A5/(1+10%)5
PV of assets = PV of liabilities
A1/(1+10%)1 + A5/(1+10%)5 = 207.393............................equ1
Duration of assets = (1*A1/(1+10%)1 + 5*A5/(1+10%)5)/207.

Liability payments of 100 each are due to be paid in 2, 4 and 6 years from now. Asset cashflow consists of A in 1 year and A, in 5 years. The yield for all payments is 10%. An attempt is made to have...

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