Question: Exhibit 13.14 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM You are creating a portfolio that consists of the following two bonds. Bond A pays

Exhibit 13.14 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM

You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000.

Refer to Exhibit 13.14. Assume that your investment horizon is two years and your portfolio consists only of bonds A and B. What proportion should be invested in each bond to immunize the portfolio?

a. Invest 72.4 percent in bond A and 27.6 percent in bond B.

b. Invest 68.3 percent in bond A and 31.7 percent in bond B.

c. Invest 27.6 percent in bond A and 72.4 percent in bond B.

d. Invest 58.5 percent in bond A and 41.5 percent in bond B.

e. Invest 31.7 percent in bond A and 68.3 percent in bond B.

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