Liability payments consists of 1000 at the end of 1 year, 2000 at the end of 2 years, and 3000 at the end of 3 years. At an annual effective interest rate of 8%, the asset payments of Bo at time t = 0 and B₂ at time t = 2 are chosen so that the present value of the asset cash flows match the present value of the liability cash flows and the duration of the asset cash flows match the duration of the liability cash flows. a) Compute Bo and B₂. b) Determine if the assets immunize the liabilities.
Liability payments consists of 1000 at the end of 1 year, 2000 at the end of 2 years, and 3000 at the end of 3 years. At an annual effective interest rate of 8%, the asset payments of Bo at time t = 0 and B₂ at time t = 2 are chosen so that the present value of the asset cash flows match the present value of the liability cash flows and the duration of the asset cash flows match the duration of the liability cash flows. a) Compute Bo and B₂. b) Determine if the assets immunize the liabilities.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:Liability payments consists of 1000 at the end of 1 year, 2000 at
the end of 2 years, and 3000 at the end of 3 years. At an annual
effective interest rate of 8%, the asset payments of Bo at time
t = 0 and B2 at time t 2 are chosen so that the present value of
the asset cash flows match the present value of the liability cash
flows and the duration of the asset cash flows match the duration
of the liability cash flows.
a) Compute Bo and B2.
b) Determine if the assets immunize the liabilities.
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