SOA Exam FM Sample Question 39
Study guide: Exam FM-2
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 and 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 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
Answer this question and see the worked solution