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QUESTION
GM has pension liabilities of $10 million/year starting in 2 years (at time 2) and lasting forever, i., a perpetuity starting at t=2.
- GM has pension liabilities of $10 million/year starting in 2 years (at time 2) and lasting forever, i.e., a perpetuity starting at t=2. They are planning to fully fund and immunize this liability stream using a portfolio of 10-year and 30-year, zero-coupon bonds. What fraction of this asset portfolio should be in 10-year bonds? Assume that an interest rate (yield) of 5% is appropriate for the valuation of all liabilities and assets.
