8.18 Harry is the owner of a small grocery store and he has only one employee, Rich. Rich is going to retire after 4 years and Harry promises to pay Rich $7,000 once a year for a 5-year period, the rst payment starting 5 years from now. Assume that Rich will be alive for at least 10 more years, that the yield curve is at and that the prevailing interest rate is 4% effective.

(a) Calculate the present value, Macaulay duration and convexity of the retirement benet entitled to Rich.

(b) Harry wants to use a $100 par value 5-year coupon bond with annual coupon rate of 4% and a $100 par value 10-year bond with annual coupon rate of 5% to construct an immunized portfolio.

Find the face value of each of the two bonds.