A Pension Fund has $100 million to invest and the board feels that a minimum of 5% annualized over next 5 years should be possible and sets this as the minimum expectation .

The hired manager finds that bonds are available with immunization rates of 7% ( with semi-annual coupons ) and a 10 year maturity and selling at par.

He invests the $100 million. For the duration of the next 5 years a bank is willing to invest coupons from this bond at 7% ( with semi-annual investment schedule ) and the manager agrees.

Consider these independent questions:

A. What is the initial Dollar Safety Margin ?

B. After a year yields go to 8% annualized . What is the new dollar safety margin?

C. If soon after the investment of the $100 million , rates jump to 10% , what minimum total return is now required , so that the manager does not have to switch to contingent immunization ?

P.s. I haven’t solved this yet