Consider the W Corporation having a $1 million obligation to pay in 7 years. W plans...

 

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Consider the W Corporation having a $1 million obligation to pay in 7 years. W plans to meet the obligation by investing in a portfolio of three bonds having a common yield of 12% in a market with a flat yield curve. Bond 1 is 3-year (maturity) 6% (coupon) bond, Bond 2 is a 5-year, 8% bond, and Bond 3 is 20- year, 7% bond. Assume annual coupon payments and a face value of $100 for all three bonds. a. Find the prices of Bonds 1, 2, and 3. b. Find the durations of Bonds 1, 2, and 3. c. Bond 2 is a municipal bond which offers W a tax advantage. Accordingly, W decided to invest at least 40% of the bond portfolio in Bond 2. Structure a bond portfolio (of Bonds 1, 2, and 3) that allows W to meet its obligation while hedging interest risk. Consider the W Corporation having a $1 million obligation to pay in 7 years. W plans to meet the obligation by investing in a portfolio of three bonds having a common yield of 12% in a market with a flat yield curve. Bond 1 is 3-year (maturity) 6% (coupon) bond, Bond 2 is a 5-year, 8% bond, and Bond 3 is 20- year, 7% bond. Assume annual coupon payments and a face value of $100 for all three bonds. a. Find the prices of Bonds 1, 2, and 3. b. Find the durations of Bonds 1, 2, and 3. c. Bond 2 is a municipal bond which offers W a tax advantage. Accordingly, W decided to invest at least 40% of the bond portfolio in Bond 2. Structure a bond portfolio (of Bonds 1, 2, and 3) that allows W to meet its obligation while hedging interest risk.