Question

You have an obligation to pay $148 in four years and 2 months. In which bond would you invest your $100 to accumulate this amount, with relative certainty, even if the there is a parallel shift in the term structure of interest rates? All bonds pay interest annually and have a face value of $100.

a)a 6-year; 10% coupon par value bond
b)a 5-year; 10% coupon par value bond
c)none of the above

Answer 1

b) a 5-year; 10% coupon par value bond.
Because at the end of the term you
will receive 100 + 100*0.1*5 = $150
This amount of money will cover the $148
obligation.