How many of each type of bond must firm purchase

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Reference no: EM133650059

Question

A life insurance company expects to pay out cash flows on policies that it has written according to the following schedule. 1-year $1 million 2-year $2 million 3-year $3 million 4-year $10 million The insurance company wants to invest in some combination of 1-year and 5-year bonds such that the liability is immunized. Both bonds have a face value of $1,000 and a ytm of 4%. The 1-year bond pays a coupon of 2% and the 5-year bond pays a coupon of 6%. You may assume annual payments. How many of each type of bond must the firm purchase?

Reference no: EM133650059

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