Question
Veronica has built a very profitable business, and she credits the University of Melbourne for a big part of her success. She would like to
Veronica has built a very profitable business, and she credits the University of Melbourne for a big part of her success. She would like to donate money to her old school to help one worthy graduate each year establish his or her own business. Veronica would like the annual award to be $25,000 and to have its first payment in exactly one year. She also would like to the program to continue forever, even long after she is no longer on this earth. You are investing on behalf of the University of Melbourne, and, unfortunately, perpetuities (which have a value of = ) are not available as investments. However, you do have access to a 30-year Australian government bonds with a 0% coupon and 10-year annual-coupon paying government bonds with a 6% coupon. Currently the yield on government debt at all maturities is 7%. How much in dollars ($) should you invest in the 30-year bond and the 10-year bond to ensure that the value of the investment remains the same as the value of the $25,000 per year liability, should interest rates change? Circle your answers. Show your work for full credit. Correct answers without the corresponding work receive 0 marks.
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