MATCHING ASSETS AND LIABILITIES
A corporation is going to have to pay a debt of 1200000 after one year, a debt of 1500000 after 2 years, and 2000000 after 3 years.
In order to set up an absolute matching strategy to pay these debts, the corporation may purchase:
A one year bond with 4% annual coupons
A two year bond with 2% annual coupons
A three year bond with 3% annual coupons
The spot rates are s1=5%, s2=4%, and s3=3%. Find the amount the corporation will have to invest now in each of these bonds to set up this strategy. What is the yeild rate for the investment in this strategy?