ABC Inc. issues bonds obligating it to pay $100,000 three years from now. ABC Inc. can fund this liability through the purchase of 2-year annual coupon bonds having 10% annual coupons and 10 year zero coupon bonds. Both bonds have a face value of $100. The annual effective rate of interest is 10%.

1. How much ABC Inc. should invest in each bond in order to meet the first two immunization conditions?
2. Determine whether or not they will meet the third condition so that they have an immunized position.
3. Suppose ABC Inc. funds their liability by purchasing the amount of each bond determined in part a) and that immediately after this purchasing these bonds, the yields on the bonds rises to 11% while the yield on their liabilities stays at 10%. Determine ABC Inc.s new surplus. What does this tell us? (What can be learned from this?)