The fund will have to pay the fund investors $1,000,000 after two years. Investors require that the fund invest in only annual coupon bonds:

1) Three year 8.5% bonds

2) Rolling one year 8% bonds

Both come in denominations of $1000.

Market Yield is 9%.

Residual Cash can earn a market yield.

Notice: you should invest more than present value of the liability amount. Hence, if you find you should invest in 481.74 shares of 8.5% bond, then you should buy 482 shares of 8.5% bond. If you find you should invest in 369.43 shares of 8% bond, then you should buy 370 shares of 8.0% bond.

Find out the portfolio value when market yield is 10% and 8% after investing.