Answers:

a) 1.6332

b) 1.6328

Liabilities of 1 each are due at the ends of periods 1 and 2. There are three securities available to produce asset income to cover these liabilities, as follows: (1) A bond due at the end of period I with coupon at rate 1% per period, valued at a periodic yield of 14%. (ii) A bond due at the end of period 2 with coupon rate 2% per period, valued at a periodic yield of 15% (iii) A bond due at the end of period 2 with coupon rate 20% per period, valued at a periodic yield of 14.95% Determine the cost of the portfolio that exactly matches asset income to liabilities due using (a) bonds (i) and (ii) only. (b) bonds (i) and (iii) only