1. Explain how the price of bonds is determined and how does the interest rate differ from the yield. Pick a 5 or 10 year bond and discuss the actual numbers.
2. Suppose liabilities of $1,000 are due to be paid at the end of years 2, 3, and 7. Asset cashflows consist A1 in 1 year and A6 in 6 years. The yield for all payments is 5%. You are going to try and immunize the liability by meeting the conditions for immunization.
1) Find A1 and A6 .
2) Verify that the conditions for immunization are met.