Answer d,e,f

16. (Bond selection) Consider the four bonds having annual payments as shown in Table 3.9. They are traded to produce a 15% yield. (a) Determine the price of each bond. (b) Determine the duration of each bond (not the modified duration), (c) Which bond is most sensitive to a change in yield? (d) Suppose you owe $2,000 at the end of 2 years. Concem about interest rate risk suggests that a portfolio consisting of the bonds and the obligation should be immunized. If VA, VB, Vc, and Vp are the total values of bonds purchased of types A, B, C, and D, respectively, what are the necessary constraints to implement the immunization? [Hint: There are two equations. (Do not solve.)] TABLE 3.9 END-OF-YEAR PAYMENTS Bond A Bond B Bond C Bond D Year 1 Year 2 Year 3 100 100 100+ 1,000 50 50 50 + 1,000 0 0 0 + 1,000 0 + 1,000 0 0 (e) In order to immunize the portfolio, you decide to use bond C and one other bond. Which other bond should you choose? Find the amounts (in total value) of each of these to purchase. (f) You decided in (e) to use bond in the immunization. Would other choices, including perhaps a combination of bonds, lead to lower total cost