A company must pay a liability of $1,000 in 2 years

Business Dec 16, 2021

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%.

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

Bond 1yr= 579.55

Bond 4yr = 285.46)

(b) 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%.