PLEASE HELP!!! liabilities matching question 2. A company must pay liabilities o

ID: 2903438 • Letter: P

Question

PLEASE HELP!!! liabilities matching question

2. A company must pay liabilities of 1,000 due 6 months from now and another 1,000 due one year from now. There are two available investments.

a. 6 month bond; 1000 face amount; 5% nominal annual coupon rate convertible semi annually with a 6% yield rate converted semi annually.

b. 1 year bond; 1000 face amount; 5% nominal annual coupon rate convertible semi annually with a 6% yield rate converted semi annually.

Find the amount of each bond to purchase and the total cost of the bonds

Please show all math required to solve this. Thanks!!

The following table summarizes what is required by the liabilities and what is provided by one unit of each of Bonds I and II.

Thus, to match the liability cash flow required in one year, (1/1.025) = .97561 units of Bond II are required

.97561 units of Bond II provide (.97561*25) = 24.39 in 6 months

Thus, (1000-24.39)/1025 = .95181 units of Bond I are required.

In 6 months In one year Liabilities require: $1,000 $1,000 One unit of Bond I provides: $1,025 One unit of Bond II provides: $25 $1,025

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