Question 2 Suppose that you have a liability where you must make a single payment of $1,931 in 10 years. The rate of interest is currently 10%. (a) Can you use the following bond to immunize: 20-year, 7% coupon, currently selling for $744.5 (par = $1,000)? Assume that interest payments are made annually. (10 marks) (b) Suppose that you invest in the bond in (a) to immunize against a change in interest rates. At the end of the 10th year, you sell the bond to repay the liability. How much do you have after repaying the liability under each of the following 3 assumed scenarios for interest rates: (1) interest rates remain constant at 10%. (5 marks) (11) immediately after investing in the bond, interest rates fall to 4% and remain at that level through the 10th year. (5 marks) (111) immediately after investing in the bond, interest rates rise to 16% that level through the 10th year. and remain at (5 marks) 1 Question 2 Suppose that you have a liability where you must make a single payment of $1,931 in 10 years. The rate of interest is currently 10%. (a) Can you use the following bond to immunize: 20-year, 7% coupon, currently selling for $744.5 (par = $1,000)? Assume that interest payments are made annually. (10 marks) (b) Suppose that you invest in the bond in (a) to immunize against a change in interest rates. At the end of the 10th year, you sell the bond to repay the liability. How much do you have after repaying the liability under each of the following 3 assumed scenarios for interest rates: (1) interest rates remain constant at 10%. (5 marks) (11) immediately after investing in the bond, interest rates fall to 4% and remain at that level through the 10th year. (5 marks) (111) immediately after investing in the bond, interest rates rise to 16% that level through the 10th year. and remain at (5 marks) 1