Pleasant View Nursing Home has decided to immunize its portfolio against interes
ID: 2668600 • Letter: P
Question
Pleasant View Nursing Home has decided to immunize its portfolio against interest rate and reinvestmentrate risk by buying a bond that has a duration equal to the years until the funds will be needed
(approximately ten years from today). The home is considering a 20-year, 9 percent annual coupon bond
bought at its par value of $1,000.
a. What is the duration of this bond?
b. If the nursing home purchases $4,224,000 worth of this bond, what would be the value of the bonds at the
end of the duration period if interest rates fall to 7 percent immediately after the purchase and remain at
that level? If interest rates rise to 12 percent?
Explanation / Answer
a. What is the duration of this bond? Ans: Duration of this bond is 20 Yrs b. If the nursing home purchases $4,224,000 worth of this bond, what would be the value of the bonds at the end of the duration period if interest rates fall to 7 percent immediately after the purchase and remain at that level? If interest rates rise to 12 percent? If Nursing home is holding the Bond till maturity ie 20 yrs, It will getback $4224,000 as Bond is always redeemed at its Face Value which is $1000. The Int rate change of 7% & 12 % ha no effect on Maturity value of Bond. The Int rate comes into picture only if one sells or buys the bond from the market after it has been issued.