Q1.

Can someone please help me with this really urgent questions asap please??? I have an exam in a day... I’ve really tried but I’m not understanding what to do at all. Suppose an investor is subject to income tax and CGT. A 10-year bond is redeemable at par (at100) and its price is, say, X.

At time 7.6 (no coupon) he sells and buys back the bond at price Y. What is the price Y? Is this a good idea?

The solution says it is not a good idea but does not expand. We have to split it up into cases, i.e. X>100, 0<X<P etc and compare the capital gain to the tax I think but I am not sure how to do this.

The solution says that ‘it will only be a good idea when offsetting is allowed’. What does this mean and why?

Q2.'

Suppose you have a decreasing continuous perpetuity p(t) = alpha [e^ -beta (t)] (an asset) and a fixed liability at time n. Can you immunise this? How?

I’m not sure how to do this as we have only been taught the discrete case. Can you provide an example please?