Question

What if your investment goal is to get an MBA from Harvard instead? It will likely run you $200,000 now and the price is increasing at the same rate as current yield. You may not want to wait as long as 10 years. You want to be rather sure that you will get exactly as much as you need and when you need it. So, you decide to invest in bonds for 5 years. The YTM now is 4%. The greatest uncertainty you face is one of interest rates going up. Construct a portfolio of two bonds that will satisfy your investment needs. (5)Show using the data table (3)and the graph (2)the profile of investment outcomes for the rate range 4%-12%.

The bond data:

	Bond 1	Bond 2
Coupon rate	3.50%	6.25%
Maturity	7	5
Face value	1,000	1,000

Answer 1

DATA TABLE

BOND A

COUPON RATE	MATURITY(MONTHS)	FACE VALUE
3.5%	84	1000

BOND B

COUPON RATE	MATURITY(MONTHS)	FACE VALUE
6.25%	60	1000