Suppose ABC Corporation has an obligation to pay $70,000 and$60,000 at the end of 4 years and 9 years respectively. In order tomeet this obligation, it plans to invest money by selecting fromthe following three bonds:
| Coupon Rate | Maturity (years) | Yield |
| Bond1 | 4% | 2 | 7% |
| Bond2 | 5% | 4 | 7% |
| Bond3 | 8% | 10 | 7% |
All bonds have the same face value $1000. Assume that the annualrate of interest to be used in all calculations is 7%. Considersemi-annual compounding.
(Keep your answers to 2 decimal places, e.g. xxx.12.)
(a) Find the present value and duration of the obligation.
Obligation price: ________ Obligation duration: __________
(b) Find the price for each of these bonds.
Bond 1: ________ Bond 2:________ Bond 3:________
(c) Determine Macaulay durations D1, D2, andD3 of these three bonds, respectively. (Keep 2 decimalplaces.)
D1: ________ D2:________ D3: ________
(d) Can the Corporation choose bonds 1 and 2 to construct itsportfolio? Justify your answer.
(e) Suppose the Corporation decides to use bonds 2 and 3. Denoteby V2 and V3 to be the amounts of money to beinvested in the two bonds, respectively. To get an immunizedportfolio, write down appropriate equations in V2 andV3 first, and solve for V2 and V3.
V2: ________ V3: ________
