Fixed Income - Cash Flow Matching Defeasance

CFA Level III Fixed Income
#1

Hi all,

I am not able to understand Cash Flow Matching in ‘Liability Driven and Index Based Strategies’. Here for SEK 5250000 liability of June 2021, when we try to figure out how much to invest to deal with this liability why do we discount the figure by just 1 year. Should we not be discounting it till the present year? Ie 5.25m/(1.055) raised to 4?

Can someone please help me?

#2

They are not discounting.

Par + Coupon = 5,250,000
Par + Coupon Rate × Par = 5,250,000
Par + 5.50% × Par = 5,250,000
(1.055) × Par = 5,250,000
Par = 5,250,000/1.055