1. A company must pay a liability of L due one year from now and 2L due two years from now. The company exactly (absolutely) matches the liabilities by buying a one-year bond with a face value of $800 and a two-year bond with face value of $2,000. Both bonds have annual coupons with a coupon rate of r for the one-year bond and 1.25r for the two-year bond. Determine r.
2. Pat sells a stock short for a price of $220. The stock pays no dividends. The margin requirement is 50% of the short sale price. The margin account earns an annual rate of 6%. The rate of return on the short sale is 10%. The stock is purchased in one year for X Determine the price X at which the stock is purchased.