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You are given the following information on annual coupon paying bonds: Term Coupon rate Face value Zero coupon yield r(0,t) 1 2.00% 1,000 3.00% 2
You are given the following information on annual coupon paying bonds:
Term | Coupon rate | Face value | Zero coupon yield r(0,t) |
1 | 2.00% | 1,000 | 3.00% |
2 | 4.00% | 1,000 | 5.00% |
3 | 7.00% | 1,000 | 6.00% |
You have incurred a liability, which has the following cash flows (end of year):
Year | 1 | 2 | 3 |
Liability CFs | 600 | 1,500 | 3,500 |
Using the information above, calculate the following:
- The price of each bond, and the present value of the liability cash flows.
- The yield to maturity of each bond and the liability cash flows (HINT: a financial calculator or excel will be required for this)
- Construct an asset portfolio that is cash flow matched with the liability, stating specifically the dollar amount of each bond you need to invest in.
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