Suppose you are working for the Canadian Treasury. The projected 2020 shortfall is $80 billion and you
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Question:
Suppose you are working for the Canadian Treasury. The projected 2020 shortfall is $80 billion and you plan to finance it by issuing new government debt. You have access to two types of bonds: 5-year bonds and 10-year bonds. The objective is to finance the shortfall using 40% 5-year bonds and 60% long-term bonds. The 5-year bond has the following characteristics : c = 5%, y = 3%, F = 10, 000. The 10-year bond has the following characteristics: c = 6%, y = 4%, F = 10, 000. Assuming that yields are semi-annually compounded and that coupons are semi-annual, how many of each type of bonds do you have to issue today to finance the deficit if the first coupon payment is due exactly 6-month from now?
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