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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
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?
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