Prepare a memo for Mr. van Wie explaining how RA would invest to minimize both risk and
Question:
Prepare a memo for Mr. van Wie explaining how RA would invest to minimize both risk and exposure to changing interest rates. Give an example of a portfolio that would accomplish this objective. Explain how the portfolio would be managed as time passes and interest rates change. Also explain why SPX’s proposal is not advisable for a conservative company like Madison.
RA manages several fixed-income portfolios. For simplicity, you decide to propose a mix of the following three portfolios:
• A portfolio of long-term Treasury bonds with an average duration of 14 years.
• A portfolio of Treasury notes with an average duration of 7 years.
• A portfolio of short-term Treasury bills and notes with an average duration of 1 year.
The term structure is flat, and the yield on all three portfolios is 5%.
Principles of Corporate Finance
ISBN: 978-1260013900
13th edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen