Question: Ballone Machineries Company (BMC), a publicly-held company, will need $800,000,000 twenty years from now to replace four assembly lines in its fast car manufacturing plants. The management plans to make 20 equal payments, starting today, into the company's brokerage account at the Pepe Investment Fund. BMC can buy bonds, which mature in 20 years, or bonds, which mature in 1 year. Both types of bonds currently sell to yield 7 percent, that is the yield to maturity of bonds is 7%. BMC's management best estimate of the future interest rates is that they will stay at current levels, this means the interest rates may fluctuate, but the expected interest rate is the current yield to maturity. There is some risk that the assembly lines will wear out in less than 20 years, in which case BMC will need to cash out its investment on assembly lines before 20 years. If that happens, BMC will desperately need the money that has been accumulated. This money could save BMC from bankruptcy.
a) How much should BMC plan to invest each year?
b) If BMC decides to invest enough right now to produce the future $800,000,000, how much must it put up?
c) What type of bond, do you recommend which might be useful for BMC 's purposes? Why? Please be short and specific.
d) What type of bond would you recommend BMC buy? Why? Please be short and specific.