USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 35

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000.
-Refer to Exhibit 13.14. Assume that your investment horizon is two years and your portfolio consists only of bonds A and B. What proportion should be invested in each bond to immunize the portfolio?

• A) Invest 72.4 percent in bond A and 27.6 percent in bond B.
• B) Invest 68.3 percent in bond A and 31.7 percent in bond B.
• C) Invest 58.5 percent in bond A and 41.5 percent in bond B.
• D) Invest 31.7 percent in bond A and 68.3 percent in bond B.
• E) Invest 27.6 percent in bond A and 72.4 percent in bond B.

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Definitions:

Identification

The process by which a specific property is designated as the subject of a sales or security agreement.

Contract

A legally binding agreement between two or more parties that outlines the terms and conditions for an exchange of goods or services.

Risk of Loss

Refers to the possibility of an asset's value decreasing due to changes in market conditions or other unforeseen circumstances.

Sales Contract

A legal agreement between a buyer and seller outlining the terms of a sale of goods or services.