A company has to meet obligations of $8 million in 1 year and $6 million in four years from now and would like to invest in bonds today to allow it to cover the payments. The yield curve is flat at 8 per cent. The management of the company is concerned about the reinvestment risk as interest rates can change.

Required:

1. How should the companys portfolio of investment be structured to minimise interest rate risk?

(2 marks)

2. If the company wants to immunize its obligations with a portfolio of zero-coupon bonds, what maturity bonds must it purchase?

(5 marks)

3. What must be the total face value of the zero-coupon bonds?

(5 marks)