A fund manager has known liabilities of £10,000 in each of the next four years. She has been asked to construct a portfolio comprising:
A 1-year, 6% coupon bond, with par value £1000, that pays its coupon annually
A 3-year, 7.5% coupon bond, with par value £1000, that pays its coupon annually
If the current yield to maturity (YTM) is 12%, calculate

a)The amounts that should be invested in each bond in order to match portfolio durations;

b)Explain briefly why a fund manager might want to undertake this type of strategy.