A company must pay liabilities of 4000 and 6000 at the end of years one and two, respectively. The only investments available to the company are one-year zero-coupon bonds with an annual effective yield of 8% and two-year zero-coupon bonds with an annual effective yield of 11%.
Determine how much the company must invest today to exactly match its liabilities.
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.
Solution: B
The company must purchase 4000 in one-year bonds and 6000 in two-year bonds. The total purchase price is 4000 /1.08 + 6000 /1.112= 8573.
Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.