Answer:
The units of the 5-year zero coupon bond that should be purchased in the optimal portfolio is:
= 6 units
Explanation:
a) Data and Calculations:
Spot rates = 5% annually
Yield of a 1-year zero coupon bond = 5%
Yield of a 2-year zero coupon bond = 5%
Yield of a 3-year zero coupon bond = 5%
Yield of a 4-year zero coupon bond = 5%
Yield of a 5-year zero coupon bond = 5%
Yield of a 6-year up to a 10-year zero coupon bond = 5%
Future Monetary Obligations:
YEAR 1 2 3 4 5 6 7 8 9 10
OBLIGATION 100 200 300 400 500 600 700 800 900 1000
PV factor 1.05 1.1025 1.1576 1.2155 1.2763 etc.
Present value of a 5-year zero coupon bond = $78.35 ($100/1.2763)
Number of units of the 5-year zero coupon bond that should be purchased in the optimal portfolio = 6.382 ($500/$78.35)
= 6 units
