Could someone explain this for me.

You have a single liability due in 10 years. In order to fulfill that liability, you must provide 6% annual compounding interest. You have four choices.

• You could buy a zero-coupon bond with a modified duration of 15 years with a 7% YTM. Also answer what the Macaulay duration of this bond is.
• You could buy a bond with a Macaulay duration (or weighted average life span) of 5 years with a 6% YTM, then re-invest the proceeds and buy a bond with (what you think will be) a 10% YTM maturing in 10 years.
• You could buy a bond with a 5.9% YTM with a modified duration slightly less than 10 years (between 9.4 and 10 years).
• You could buy a bond with an 6.6% YTM with a modified duration slightly less than 12 years (between 11.2 and 11.9 years).

Which purchase would be the most sensible choice (your main aim is to fulfill the liability). The answer must involve a discussion of duration and some numbers to back up your answer (do not have to be extensive numbers).