I do not need any EXCEL solution. Please don\'t give it to me. Thanks! Joe must

Question

I do not need any EXCEL solution. Please don't give it to me. Thanks!

Joe must pay liabilities of 1000 due 6 months from now and another 1000 due one year from now. There are two available investments:

• Bond 1: A 6-month bond with face amount of 1000, an 8% coupon rate convertible semiannually and a 6% yield rate convertible semiannually.

• Bond 2: A 1-year bond with face amount of 1000, a 5% coupon rate convertible semiannually and a 7% yield rate convertible semiannually.

Calculate the amount of each bond that Joe should purchase to exactly match the liabilities.

Explanation / Answer

Bond 1

Price = 1000 * 4% ( PV factor 3%, 1year) + 1000 * PV factor 3%, 1 year

= 40 * 0.971 + 1000* 0.971 = 1009.84

Bond 2

Price = 1000 * 2.5 % ( PV factor 3.5%, 1-2years) + 1000 * PV factor 3.5%, 2nd year

= 25 * 1.899 + 1000* 0.9335 = 980.98

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