A company has to pay 2,000(10 t) at the end of year t, for t = 5, 6, 7, 8, 9. It values these liabilities assuming that there will be a constant effective annual rate of interest of 6% pa. (a) Calculate the present value of the companys liabilities. [5] The company wants to immunise its exposure to the liabilities by investing in two bonds:

Bond A pays coupons of 5% pa annually in arrears and is redeemable at par in 15 years time

Bond B is a zero-coupon bond that is redeemable at par in 5 years time

The gross redemption yield on both stocks is the same as the interest rate used to value the liabilities

(b) Determine the amount that the company should invest in each of the two bonds to ensure that the present value and discounted mean term of the assets are equal to those of the liabilities. [12] (c) What additional consideration should the company make to immunize its exposure to the liabilities?