Question: explain why calculation step by step Consider an investor that needs to cover a liability of $1,000 in two years from now. He can invest

 explain why calculation step by step Consider an investor that needs

explain why calculation step by step

Consider an investor that needs to cover a liability of $1,000 in two years from now. He can invest into (i) a one year discount bond and (ii) a three year pure discount bond both having a face value $100. Assume that the yield to maturity is 10%. How many units of the three year pure discount bond does the investor need to purchase to be able to cover the liability of $1,000 for sure even if the yield to maturity changes in the second year? (a) 10 (b) 5.5 (c) 4.13 (d) 0.5

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