a financial institution has an investment horizon of two years 9.33 months (or 2.777 years). the institution has converted all assets into a portfolio of 8 percent, $1,000 three-year bonds that are trading at a yield to maturity of 10 percent. the bonds pay interest annually. the portfolio manager believes that the assets are immunized against interest rate changes. is the portfolio immunized at the time of the bond purchase? what is the duration of the bonds? will the portfolio be immunized one year later? assume that one-year, 8 percent zero-coupon bonds are available in one year. what proportion of the original portfolio should be placed in these bonds to rebalance the portfolio?

The investment horizon is either 21.5 months, 9.5 months, or 1 year. Therefore, the following approach can be used to determine the percentage of bonds that should be in the zeros:

21.5 months is X*12 months + (1-X)*23 months

X = 13.6 percent. As a result, after a year, 13.6% of the bond portfolio should be in zeroes.

The investment horizon will be 1 year, 9.5 months long after the first year. The bonds will be in effect for 1.9247 years, or 1 year and 11+ months, at this time. As a result, the bonds will no longer be immunized.

The tenure of the bonds is 2.7774 years or 33.33 months. Practically speaking, the bond investment horizon was immunized when it was purchased.

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