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c) You have an obligation to pay $1,000,000 in 2 years. The market yield to maturity is 10% for all maturities, with annual compounding. You
c) You have an obligation to pay $1,000,000 in 2 years. The market yield to maturity is 10% for all maturities, with annual compounding. You would like to make an investment now to enable the fund to meet this obligation in 2 years' time. The investment will be a portfolio containing two of the following bonds. Bond A is a zero-coupon bond. Bond B pays 15% coupon annually. Bond Face value ($) Maturity (years) Coupon A 100 1 0% IB 100 3 15% i) What is the present value of the obligation to pay $1,000,000 in 2 years? [1] ii) What are the fair prices of bond A and B? [3] What are the durations of bond A and B? [4] iv) How many bonds A and B should you buy to fully immunise your obligation? [4]
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