A liability is paid continuously in perpetuity. The annual rate of payment for the first 5 years is 10 and thereafter is 5. The effective rate of interest applying is 5%p.a. An asset pays nominal amounts P and Q after 10 and 20 years respectively. Calculate the values of P and Q such that the asset and liability payments have the same present values and the same discounted mean terms at an effective rate of interest of 5%p.a. What's a drawback with the matching strategy outlined here.

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answer First let us calculate the Present value of the perpetuity payments First lets see th value o... View the full answer