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Liability payments consists of 1000 at the end of 1 year, 2000 at the end of 2 years, and 3000 at the end of 3
Liability payments consists of 1000 at the end of 1 year, 2000 at the end of 2 years, and 3000 at the end of 3 years. At an annual effective interest rate of 8%, the asset payments of B0 at time t = 0 and B2 at time t = 2 are chosen so that the present value of the asset cash flows match the present value of the liability cash flows and the duration of the asset cash flows match the duration of the liability cash flows. a) Compute B0 and B2. b) Determine if the assets immunize the liabilities.
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