ACTSC445 Lecture Notes - Reinvestment Risk, Yield Curve, 0 (Year)

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Department of statistics and actuarial science, university of waterloo. 3 of financial economics (on reserve at the library: call number hg174 . f496 1998). Asset allocation problem (i. e. , must choose assets that will produce an immunized portfolio) We"ll start with the case where there is only one liability in the portfolio, with corresponding cash ow of lt at some time t. The goal is to choose an asset cash ow sequence {at, t > 0} that will, along with lt, produce an immunized portfolio. Example i: suppose an insurance company faces a liability obligation of million in 5 years. The available market instruments are: 3-year, 5-year and 7-year zero-coupon bonds, each yielding 6% annual e ective rate: portfolio a: invest ,258. 17 in the 5-year zero coupon bond. 1: portfolio b: invest the same amount (i. e. ,258. 17) in a 3-year zero coupon bond.

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