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Consider a firm that needs to finance an investment project. The firm's project will generate cash flows every six months for six vears. The first
Consider a firm that needs to finance an investment project. The firm's project will generate cash flows every six months for six vears. The first four payments the firm will receive will be $100, 000, the next four will be $200, 000, and the final four payments will be $300, 000. The cost of the investment is $1, 979, 503 and the (continuously compounded) yield curve is flat at 5%. The remaining part will be financed using short-term (zero duration) borrowing. Suppose the firm chooses the amount of short-term and long-term borrowing to min- imize its exposure to interest rate risk. How much of the investment project should be financed using the 10 year bond
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