Homework #5- Bond PortfoliosDue 10/21

You are managing a bond portfolio for a pensionfund that is required to pay pension benefit payments for 5 years starting in December, 2022.You cash flow match the liabilities using the bonds presented in your finance class.Using the bonds in class from Table 2, the cost to cash flow match was $12,304 with an average duration of 3.80.You decide that its worth using bonds with a lower credit rating to get the cost to cash flow match down.Using the bonds in Table 3,replace each bond in Table 2 with one that has ahigher YTMbutsameMaturity.The coupon rate for the replacement bond will vary.Therefore you will need to adjust the quantity purchased by change the par value.You begin with 2026 and move backward like in class.Your goal is 1) cash flow match at a lower cost, 2) maintain a positivenew cash balancein the last column of Table 1 for each year (this ensures all benefits are able to be paid each year),and minimize the ending cash balance in cell O24 (this will improve efficiency).

Question.Given that it cost less less to cash flow match, did the excess return on the cash flow matching come with any risk?Explain.

Table 1 2020-10 Reinvestment 0.5% Previous Interest on Principal Coupon Reinvestment Liability New Cash Date Cash Bal Balance Payments Payments of Payments Due Balance Excess