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An insurance company accepts an obligation to pay 10,000 at the end of each year for 2 years. The insurance company purchases a combination of
An insurance company accepts an obligation to pay 10,000 at the end of each year for 2 years. The insurance company purchases a combination of the following two bonds (both with $1,000 par and redemption values) in order to exactly match its obligation: Bond A: A 1-year 5% annual coupon bond with a yield rate of 6%. Bond B: A 2-year 8% annual coupon bond with a yield rate of 7%. Find the numbers (which need not be integers) of each bond the insurer must purchase to exactly match its obligations.
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