An insurance company has an obligation to pay

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(9) An insurance company has an obligation to pay $12,000 one year from now, and $9,000 two years from now. The insurance company purchases a combination of the followingtwo bonds (both with $ 1,000 par and redemption values) in order to exactly match itsobligation:

Bond A: A 1-year 6% annual coupon bond with a yield rate of 5%.

Bond B: A 2-year 8% annual coupon bond with a yield rate of 9%.Determine NA and NB, the respective number of each type of bond the insurer mustpurchase to exactly cash flow match its obligations.

(10) Using the situation in problem (9) above, find the total cost, now, to the insurer of purchasing the needed number of bonds for cash flow matching purchases.

Reference no: EM13875494

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