A fund manager has to invest $100,000 and deliver a return of 5% per year at the end of

year 4. In order to deliver such return, the manager can invest in either of the following

alternatives:

p

o

A 4 year, $100,000 face value bond, 5% coupon rate, sold at par

A 5 year, $100,000 face value bond, 5% coupon rate, sold at par.

Which of these alternatives gives the less variance of cash flows if the interest rate is

expected to tluctuate between 4 and 6 percent?