Question
Firm XYZ is required to make a $5M payment in 1 year and a $4M payment in 3 years. The yield curve is flat at
Firm XYZ is required to make a $5M payment in 1 year and a $4M payment in 3 years. The yield curve is flat at 10% APR with semi-annual compounding. Firm XYZ wants to form a portfolio using 1- year and 4- year U.S. strips to fund the payments (a stripped bond is a type of financial engineering where a bond is decomposed, and its cash-flows are sold either singularly or as a subset of the total cash-flows). How much of each strip must the portfolio contain for it to still be able to fund the payments after a shift in the yield curve? Hint: a change in yield curve means an interest rate change.
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