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PLEASE NOTE: THIS QUESTION HAS BEEN POSTED BEFORE BUT WRONG ANSWERS WERE PROVIDED. PLEASE DO NOT...

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Finance

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.

Answer & Explanation Solved by verified expert
3.9 Ratings (464 Votes)
In order to immunize companys liability follow below stepsCalculate present value of companysliabilityCalculate Current Bond Price of    See Answer
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