Suppose Ice Cubes, Inc. has the following liability due in five years. The company is going to buy bonds today in order to meet the future obligation. The liability and current YTM are below. Amount of Liability: $100,000,000 Current YTM: 8%

a. At the current YTM, what is the face value of the bonds the company has to purchase today in order to meet its future obligation? Assume that the bonds in the relevant range will have the same coupon rate as the current YTM and these bonds make semiannual coupon payments.

b. Assume that the interest rates remain constant for the next five years. Thus, when the company reinvests the coupon payments, it will reinvest at the current YTM. What is the value of the portfolio in five years?

c. Assume that immediately after the company purchases the bonds, interest rates either rise or fall by one percent. What is the value of the portfolio in five years under these circumstances?

d. What is the duration of the liability for Ice Cubes, Inc.?

e. Suppose the two bonds shown below are the only bonds available to immunize the liability. What face amount of each bond will the company need to purchase to immunize the portfolio?

Bond A Settlement: 1/1/2000 Maturity: 1/1/2003 Coupon Rate: 7.00% YTM: 7.50% Coupons per Year: 2

Bond B Settlement: 1/1/2000 Maturity: 1/1/2008 Coupon Rate: 8.00% YTM: 9.00% Coupons per Year: 2