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What is the total cost of the asset portfolio

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William plans to attend college for 3 years. His first day of college will be one year from today. He expects tuition to cost $15,000 in the first year. He also estimates that the college will increase his tuition by 4% each year for the next two years. Tuition costs are due at the beginning of each academic year.

William would like to exactly match these liabilities using the following assets:

  1. a one-year coupon bond with annual coupon of 3% and a yield to maturity of 4%
  2. a two-year zero coupon bond with a yield to maturity of 4.5% 
  3. a three-year coupon bond with annual coupons of 7% and a yield to maturity of 5%

Problem 1: What is the total cost of the asset portfolio that will exactly match the liabilities?

Reference no: EM132729254

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