Pleasant View Nursing Home has decided to immunize its portfolio against interest rate and reinvestment rate 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?
(Please utilize and respond to this answer on the attached excel spreadsheet)
Capital Risk Management is clearly illustrated in this case.