A bond fund is managing a portfolio against a client's liabilities. The liability comprises the requirement to
Question:
A bond fund is managing a portfolio against a client's liabilities. The liability comprises the requirement to pay $1,100,000 at the end of the next two years. The fund manager wishes to use the cash flow matching approach. Which bonds should the fund manager buy?
Select one:
a. A bond paying 10% annual coupons with two years to maturity and a face value of $1,000,000 and the same bond with one year until maturity.
b. A bond paying 10% annual coupons with two years to maturity and a face value of $1,100,000 and the same bond with one year to maturity.
c. A zero-coupon bond with two years to maturity and a face value of $1,000,000 and a zero-coupon bond with one year to maturity and a face value of $1,000,000
d. A bond paying 10% p.a. annual coupons with two years to maturity and a face value of $1,000,000 and a zero-coupon bond with one year until maturity and a face value of $1,000,000.
e. A three-year bond with a face value of $10,000,000 and a coupon rate of 11% paying coupons annually.
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown