(c) Consider the following hypothetical investment for the fund. Issue a one-month liability and purchase a $1,000, 15-year, 5% coupon Treasury bond. Assume that the one-month interest rate is currently 2% and that the 15-year interest rate is currently 5%. How much in liabilities would the fund have to issue to finance the purchase of the Treasury bond? At the end of one year the fund has received the coupon-interest payment on the bond and paid interest on its short-term liabilities. What is the net earnings for the fund for that year? What is the value of the bond investment at the end of the year (there are 14 years to maturity remaining on the bond) assuming that the long-term rate is still 5%? What is the net asset value (market value of assets minus liabilities) of the fund?

(d) At the beginning of the second year, assume that the short-term interest rate increases to 5% while the long-term rate increases to 7%. What happens to the earnings of the fund during the second year assuming that the short-term and long-term interest rates remain at 5% and 7%, respectively? What is the value of the bond investment at the end of the second year? What is the net-asset value of the fund for this hypothetical investment? Is the fund solvent?