A company has liabilities of $500, $850, $1000, and $2550 due at the end of years 1, 2, 3, and 4 respectively. The only investments available are the following bonds, all redeemable at par:

• 1-year 9% annual coupon bond
• 2-year 4% annual coupon bond
• 3-year 3% annual coupon bond
• 4-year 6% annual coupon bond

Given an effective rate of interest of 5%, how much should the company invest in the 2-year bond in order to exactly match the assets and liabilities.

Possible Answers

A. 593.71

B. 617.45

C. 642.40

D. 654.56

E. 669.20