If the investor wants to use a 3-year zero-coupon bond and


Suppose an investor currently holds two bonds. One is a five-year bond with a 5% coupon rate and annual coupons. This bond's yield to maturity is 6%. The other is a 2- year bond with a 9% coupon rate and annual coupons, whose yield to maturity is 5%. The current values of investment in the first and second bonds are $ 1 million and $ 2 million, respectively. If the investor wants to use a 3-year zero-coupon bond and a 4- year zero-coupon bond to hedge his position in interest rate risk, what can he do?

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Finance Basics: If the investor wants to use a 3-year zero-coupon bond and
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