The fund will have to pay the fund investors $1,000,000 after two years.  Investors require that the fund invest in only annual coupon bonds:

 

1) Three year 8.5% bonds

2) Rolling one year 8% bonds

Both come in denominations of $1000.

Market Yield is 9%.

 

Residual Cash can earn a market yield:

Notice: you should invest more than present value of the liability amount? Hence, if you find you should invest in 481.74 shares of 8.5% bond, then you should buy 482 shares of 8.5% bond. If you find you should invest in 369.43 shares of 8% bond, then you should buy 370 shares of 8.0% bond/

Required: Find out the portfolio value when market yield is 10% and 8% after investing?

Answer rating: 100% (QA)

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