The term structure of interest rates is flat at 5%. You want to immunize a $1,000 maturing in 5 years. To do so you may invest in a combination of following •Bond A: 10-year zero coupon bond, FV=100 Bond B: 3-year 10% coupon bond, FV=100 What are your portfolio weights on Bond A and Bond B?

The term structure of interest rates is flat at 5%. You want to immunize a $1,000 maturing in 5 years. To do so you may invest in a combination of following •Bond A: 10-year zero coupon bond, FV=100 Bond B: 3-year 10% coupon bond, FV=100 What are your portfolio weights on Bond A and Bond B?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.

Question

The term structure of interest rates is flat at 5%. You want to immunize a liability of
$1,000 maturing in 5 years. To do so you may invest in a combination of the
following
•Bond A: 10-year zero coupon bond, FV=100
•Bond B: 3-year 10% coupon bond, FV=100
What are your portfolio weights on Bond A and Bond B?
O a. 31% in Bond A; 69% in Bond B
O b. 69% in Bond A; 31% in BondB
O c. 40% in Bond A; 60% in Bond B
O d. 35% in Bond A; 65% in Bond B.
ہے
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