You work in the treasury department for a major manufacturer. You are instructed to build a bond portfolio that will fully insulate the investment from movements in interest rates for a capital investment the company will be making in 5.25 years. You can assume that the market weighted average duration of the bond investment is correct. The capital investment will total $25,000,000. These bonds are selected because they make quarterlyinterest payments. You can build the portfolio using these three different bonds:

Seven year zero coupon treasuries bonds, current YTM 3.85%; up to $20,000,000

Six year corporate junk bonds, coupon of 9.70%, YTM 8.45%; up to $20,000,000

Six year emerging market bonds, coupon of 6.20%, YTM 5.35%; up to $20,000,000

1. Given this information what is the goal (solution) for this problem. In other words what would allow you to achieve you mission?
2. In words describe what you want to do, the process needed to follow to achieve what you had in A?
3. Present a solution to the problem.
4. Now, if you had the same restrictions, but only had access to invest up to $14,000,000 in each of the three bonds, what could be a solution?

Answer rating: 100% (QA)

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