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

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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 ?=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.