3 a) A company has decided to use bonds to finance a liability of $20,000 that must be re-paid usingtwo payments. The first payment of $5000 must be made at the end of 6.75 years and the secondpayment of $15,000 must be made at the end of 8 years. There are currently three bonds in themarket that are suitable to immunize these payments, Bond 1 which is a five-year pure discountbond with a face value of $1000, Bond 2 which is an eleven-year pure discount bond issued one yearago with a face value of $1500 and Bond 3 which is a seven-year pure discount bond issued threemonths ago with a present value of $594.83. Given that the yield to maturity in the bond market is8%, determine:(i)two separate portfolio strategies that will allow the company to immunize each liabilitypayment.for each of the portfolio strategies computed in Part 3(a)(i) above, the number of units thecompany should buy in each bond(ii)

Bonds are a type of debt that you grant to the issuer in exchange for interest. Your money,…

Answered: 3 a) A company has decided to use bonds…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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