FM practice question

Hello i need help with this problem!



Joe must pay liabilities of 1,000 due one year from now and another 2,000 due three years from now. There are two available investments:

Bond I: A one-year zero-coupon bond that matures for 1000. The yield rate is 6% per year

Bond II: A two-year zero-coupon bond with face amount of 1,000. The yield rate is 7% per year.

At the present time the one-year forward rate for an investment made two years from now is 6.5%

Joe plans to buy amounts of each bond. He plans to reinvest the proceeds from Bond II in a one- year zero-coupon bond. Assuming the reinvestment earns the forward rate, calculate the total

purchase price liabilities.

of Bond I and Bond II where the amounts are selected to exactly match the

Liabilities



a)2584

b)2697

c)2801

d)2907

e)3000



Thanks in advance!! :)

FM practice question