Company XYZ has a liability of $6,000 that is due in 3 years. The company could invest in zero-coupon bonds to be immunized against the liability from future large interest rate changes. Bond X is a 1-year zero coupon and Bond Y is a 5-year zero coupon bond. Company XYZ plans to invest in Bond X and Bond Y. How much should Company XYZ invest in Bond X, assuming an effective interest rate of 5%?

Explanation:

From the given information:

The present value of the cash flow of assets and liabilities is:

Thus;

Solving for x&y in the equations P(0.05) = 0 & P'(0.05) = 0

Then;

x+y = (60000) * (1.05)⁻³

x + y = 51830.26

and

x + 5y = 180000* (1.05)⁻³

x + 5y = 155490.7677

x + y = 51830.26

x + 5y = 155490.7677

0  +  4y = 103660.51  

4y = 103660.51

y = 103660.51/4

y = 25915.1275

Since y = 25915.1275 and x + y = 51830.26

Then x = 51830.26 - y

x =  51830.26 - 25915.1275

x = $25915.13

Thus, Company XYZ should invest the sum of $25915.13 into Bond X.

The statement is: True.

Explanation:

Comparability refers to the capacity of comparing two or more companies regardless of their industry over one economic period while consistency is the capacity firms have to keep their operations going under the same method over different periods of time.