Revision as of 19:49, 20 November 2023 by Admin (Created page with "'''Solution: A''' Bond I provides the cash flow at time one. Because 1000 is needed, one unit of the bond should be purchased, at a cost of 1000/1.06 = 943.40. Bond II must provide 2000 at time three. Therefore, the amount to be reinvested at time two is 2000/1.065 = 1877.93. The purchase price of the two-year bond is 1877.93/1.07<sup>2</sup> = 1,640.26. The total price is 2583.66. {{soacopyright | 2023 }}")
Exercise
Nov 20'23
Answer
Solution: A
Bond I provides the cash flow at time one. Because 1000 is needed, one unit of the bond should be purchased, at a cost of 1000/1.06 = 943.40.
Bond II must provide 2000 at time three. Therefore, the amount to be reinvested at time two is 2000/1.065 = 1877.93. The purchase price of the two-year bond is 1877.93/1.072 = 1,640.26.
The total price is 2583.66.
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.