Liability payments consists of 1000 at the end of 1 year, 2000 at the end of 2 years, and 3000 at the end of 3 years. At an annual effective interest rate of 8%, the asset payments of Bo at time t = 0 and B₂ at time t = 2 are chosen so that the present value of the asset cash flows match the present value of the liability cash flows and the duration of the asset cash flows match the duration of the liability cash flows. a) Compute Bo and B₂. b) Determine if the assets immunize the liabilities.

Liability payments consists of 1000 at the end of 1 year, 2000 at the end of 2 years, and 3000 at the end of 3 years. At an annual effective interest rate of 8%, the asset payments of Bo at time t = 0 and B₂ at time t = 2 are chosen so that the present value of the asset cash flows match the present value of the liability cash flows and the duration of the asset cash flows match the duration of the liability cash flows. a) Compute Bo and B₂. b) Determine if the assets immunize the liabilities.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

ChapterM: Time Value Of Money Module

Section: Chapter Questions

Problem 7MC

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