You plan to save for a liability of $10,000 that is coming due in 5 years. The

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Question:

You plan to save for a liability of $10,000 that is coming due in 5 years. The appropriate rate of interest for this liability is 5.00%. You wish to immunize yourself from interest rate risk, and to this end you may invest in 2-year zero-coupon bonds yielding 4.00% and 8-year zero-coupon bonds yielding 7.00%. Both bonds have a face value of $1000. (Use annual compounding. Round all your answers to 2 decimals.)

What is the present value of your liability?
What is the duration of your liability?
How many 2-year bonds do you need to purchase?