Your company holds $2 million in cash and $5 million worth of ten-year government bonds at the interest rate of 1.5 percent. This portfolio has been carefully arranged based on the assumption that the Fed will not raise the interest rates this year. Now, while the financial market participants continue to act on the assumption of no rise in interest rates, you come to believe that the trends in the economy will soon change and the Fed will have to adopt a tighter monetary policy in next couple of months, raising the interest rates on one-year government bonds to 3 percent. Assume that the Fed's decision will not affect the future prospects of your company's input or output markets. If your company does not need to use any part of its cash and bond portfolio mentioned above, which one of the following strategies will yield a higher value for the portfolio if indeed the Fed raises the interest rates in the next couple of months?

a.Keep the portfolio unchanged.

b.Sell some of the bonds and hold more cash.

c.Use some of the cash to increase bond holdings.

d.Sell some of the bonds and reduce cash holdings.

e.Keep the cash holdings constant and buy more bonds with money from other sources.