A zero coupon bond
A 5% coupon bond
An 8% coupon bond
Suppose you are Investing money in an RESP (Registered Educational Savings Plan) to meet your child’s post-secondary schooling expenses. You expect you will have to pay out $20,000 per year for 4 years starting 9 years from now. We will just consider the first year’s obligation of $2,000. You have available the three bonds described in above.
a. Calculate the current price and duration of each bond.
b. Calculate the shares of Bonds 1 and 3 in an optimal immunized portfolio.