Problem 4
Year 0
Yield to maturity in year 0	10%
Obligation of $1948.72 is due in 7 years
	Bond 1	Bond 2	Bond 3	Bond 4
Coupon rate	3.0%	8.0%	11.0%	12.0%
Maturity	20	10	9	8
Face value	1,000	1,000	1,000	1,000
Bond price
Face value equal to $1,000 of market value
Duration
Year 7
Yield to maturity year 7	10%
	Bond 1	Bond 2	Bond 3	Bond 4	Portfolio
Bond price
Reinvested coupons
Total
Multiply by percent of face value bought
Product (Terminal value)
(a) Fill out the tables above (year 0 and year 7) and explain which bond would you use to
meet the obligation? (5 pts)
(b) What other two bonds could you use in a portfolio to meet the obligation at any interest rate in year 7 and in what
proportion? List all possibilities. Assume only long position in each bond is allowed. (10 pts)
(c.) What is better, the bond you've selected in part (a) or one of the two bond portfolios you've described in part (b)?
Construct data table that shows the terminal value for the bond picked in part a and for all possible bond portfolios from part (b) as a function of
interest rate in year 7. Using resulting data table explain your choice. Use Data Table feature of Excel.
Use year 7 interest rate range between 1% and 14% inclusive. (hint: Look at Lecture 10 on portfolio convexity) (10 pts)