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You are a treasurer of a company and are obliged to arrange for a debt payment of $1,000,000 2 years from now.

Assume annual compounding and annual coupon payment.

The term structure of interest rates is flat at r = 6%. In order to prepare for the debt you decide to invest in a portfolio of 2-year 6% coupon bond and 3-year 6% coupon bonds. Both bonds have a face value of $1000 per share. How many bonds of each type should you buy, not only to fund the obligation but also to insure against having to invest more in the future to make up for any shortfall if interest rates change?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91768719

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