Immunization Example (SOA Exam FM – Financial Mathematics – Module 4, Section 5, Example 1)

SOA Exam FM (Financial Mathematics) Module 4, Section 5, Example 1

Example given in the video:

A company has a liability of 72,900 due in two years. They wish to immunize this liability at an interest rate that corresponds to an annual discount factor of 𝑣=0.9 by using a one-year zero coupon bond and a three-year zero coupon bond. Determine how much of the one and three year bonds should be bought.

After completing this video you should be able to:
- Define and recognize the definitions of the following terms: immunization (including full immunization), Redington immunization.

Fact: If there is an asset on each side of a liability, and the first two conditions of immunization are satisfied, then full immunization is achieved.

If there is a liability on each side of an asset, then immunization cannot be achieved.

[epsilon]

So helpful to hear another voice explain it in a different way. Thank you for all your content!

[minhngocle]

Thank you! Such a well explained video I could find.

[carlostorres-rivera]

Wait... Does this mean that you can obtain the immunization rate by taking the derivative of P(i) and setting it equal to zero? Since the interest rate in which P(i)=0 is a minimum.

[yaweli]

If you want to know much of the one year and 3 year zero coupon bonds should be bought, shouldn’t the answer be the present values of F1 and F3 instead of the face amounts? I am thinking you buy a bond at a price at time 0, and not the face amount.