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How much of each bond should the company buy

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A company must pay a liability of $1,000 in 2 years. Zero coupon bonds with terms of 1 year and 4 years are available for investment. The effective rate of interest is 7.5%.

Question 1: How much of each bond should the company buy in order to achieve full immunization?

Bond 1yr= 579.55

Bond 4yr = 285.46)

Question 2: Show empirically that immunization has been achieved even for large changes in the interest rate. Take as an example a decrease in the interest rate to 0% and an increase to 100%.

Reference no: EM132584081

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