PLEASE NOTE: THIS QUESTION HAS BEEN POSTED BEFORE BUT WRONGANSWERS WERE PROVIDED. PLEASE DO NOT COPY THOSE ANSWERS AND PASTETHEM HERE AGAIN. I WOULD APPRECIATE A FRESH ATTEMPT. HERE IS THEQUESTION:
A company has a payment due in three and a half years’ time of$50m. The current market interest rate for this company and thismaturity is 2.55%. In order to immunise against this liability,they would like to invest in assets. Two bonds with the followingcharacteristics are available:
| Bond A | |
|---|
| Principal: | $1000 |
| Annual Coupon: | 3% (paid once per annum) |
| Maturity: | 6 years |
| Yield to maturity: | 4.25% |
| Bond B | |
|---|
| Principal: | $1000 |
| Annual Coupon: | 2.55% (paid once per annum) |
| Maturity: | 3 years |
| Yield to maturity: | 3.00% |
Given the above information, how many of each bond would yousuggest the company to invest in? Show all calculations.
