1. The only investments available are one-year zero coupon bonds and two-year 5% annual coupon bonds maturing at par. These bonds can be bought in any quantity, including fractional units. A company expects to pay a benefit of $600 in one year and $900 in two years. How much of each bond (in terms of maturity values) should the company buy in order to exactly match the assets and liabilities? If the current market interest rate is 7%, what is the cost of buying this portfolio?

Answer rating: 100% (QA)

To match the liabilities of 600 in one year and 900 in two years the comp... View the full answer