Problem:
Suppose the following coupon info
Maturity (year) Coupon Rate
1 2%
2 3.50%
3 4%
4 5.50%
5 6%
10 7%
Yield to maturity is 6%
Suppose I have a liability to of $20,000 to pay at the end of year 7
1. How to immunize my liabilities with the following constraints?
Case A: Can invest any bond of different maturity shown above
Case B: Can only invest any bond (shown above) of with maturities of no more than 5 year.
2. In case A, and B, what would happen if the yield fall to 4.5%? What if the yield goes up to 7%