You are the treasurer of a company. Due to prior commitments associated with the purchase of office buildings, you are obliged to arrange for the following series of payments:

t=0 1 2 3 4 5 10M 10M 10M 10M 20M

*Assume annual compounding.

The term structure is flat at r = 4%. In order to prepare for these outlays you decide to invest in a portfolio of 3-year 6% coupon bonds and 5-year 8% coupon bonds. Both bonds have a face value of $1000 per share. How many bonds of each type should you buy, not only to fund the obligation but also to insure against having to invest more in the future to make up for any shortfall if rates change?

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