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Actuarial FM question: Dave needs to pay $1000 at the end of each year for the next 3 years. He purchased 3 different annual coupon
Actuarial FM question:
Dave needs to pay $1000 at the end of each year for the next 3 years. He purchased 3 different annual coupon bonds to match the liabilities exactly. The bonds have the following properties:
Bond | Time to Maturity | Coupon Rate |
A | 1 | .04 |
B | 2 | X |
C | 3 | .05 |
All three bonds have a par value of $1,000 and can be redeemed at par. Dave purchased 0.9 of Bond A. Determine the coupon rate of Bond B to match the cash flows of the bonds to the cash flows of the liabilities. Assume fractional bond purchases are allowed.
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