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Answer: C
The correct answer is C. This is a portfolio immunization problem where we need to match key rate durations. The calculations show: - 10-year face value: $100,000 - 5-year face value: $25,000 (from F(5)×0.04 + 100,000×0.05 = 60) - 2-year face value: $75,000 (from F(2)×0.01 + 25,000×0.01 + 100,000×0.01 = 20) These values create a portfolio that is immunized against interest rate changes at the key rate points.
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The 10-year face value required is simply = $100 / $0.1 * $100 = $100,000;
The five-year face value required is found by solving for F(5) in:
F(5)0.04/100 + $100,000 * 0.05/100 = 60, such that F(5) = $25,000.
The two-year face value required is found by solving for F(2) in:
F(2)0.01/100 + $25,0000.01 / 100 + $100,0000.01 / 100 = 20, such that F(2) = $75,000.
A
A
B
B
C
C
D
D
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