A company has liabilities of size 1,410 at each of times t=1, t=2 and t=3. They

Question

A company has liabilities of size 1,410 at each of times t=1, t=2 and t=3. They choose to exactly match liabilities to assets by purchasing a one-year bond with face value F1 paying annual coupons at an annual coupon rate of 3.4%, purchasing a two-year bond with face value F2 coupons at an annual coupon rate of 3.7%, and purchasing a three-year bond with face vale F3 paying annual coupons at an annual coupon rate of 4.5%. Determine the face (par) value F1 for the one-year bond. (Note:You will need to find the face value of all three bonds in order to solve the problem. I am only asking you to enter the face value for the one-year bond). Round your answer to the nearest cent.

Please show work no excell

Explanation / Answer

At T =1

They have a liability of 1410 at each period that means they need to return 1410 at the end of period 1

Bond F1

Par Value 1410

Maturity 3 years

Rate 4.5

Bond F2

Par Value 1346.55

Maturity 2 years

Rate 3.7%

Bond F3

Par Value 1296.73

Maturity 1 year

Rate 3.4%

63.45

Hence the face value of F1 is 1296.73

Year Liability

Bond F1

Par Value 1410

Maturity 3 years

Rate 4.5

Unfunded Liability

Bond F2

Par Value 1346.55

Maturity 2 years

Rate 3.7%

Unfunded Liability

Bond F3

Par Value 1296.73

Maturity 1 year

Rate 3.4%

1 1410

63.45

1346.55 49.82 1296.73 1340.81882 2 1410 63.45 1346.55 1396.37 3 1410 1473.45

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.