Question
A company must pay a liability of L due one year from now and 2L due two years from now. The company exactly (absolutely) matches
A company must pay a liability of L due one year from now and 2L due two years from now. The company exactly (absolutely) matches the liabilities by buying a one-year bond with a face value of $800 and a two-year bond with face value of $2,000. Both bonds have annual coupons with a coupon rate of r for the one-year bond and 1.25r for the two-year bond. Determine r.
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Managerial Economics Theory Applications and Cases
Authors: Bruce Allen, Keith Weigelt, Neil A. Doherty, Edwin Mansfield
8th edition
978-0393124491, 393124495, 978-0039391277, 393912779, 978-0393912777
