Topic 6

Managing Bond
Portfolios
McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
What are fixed income securities?
2
What are fixed income securities?
Investors lend funds to the borrowers
(corporations and governments).
The borrowers are obligated to repay interest
and principal at periodic intervals to the
investors in the future.

3
The global bond market structure
According to Merrill Lynch, Growth trends in
the world bond markets, Jan. 26, 2007:
The total outstanding amounts of the global
corporate bond markets as of August 2007 were
$2,750, $1,424, and $528 billions for US, Europe,
and UK regions, respectively.
Government bonds made up about 53% while
corporate bonds accounted for 18% of
outstanding bonds as of 2006.
4
Components of the global bond market
The international sector of the global bond
market has two components:
Foreign bonds
Eurobonds
5
Foreign bonds
Bond issues sold primarily in one country and denominated
in the countrys currency by a foreign borrower of a
different nationality.
Royal Dutch Shell plc issued USD2750 million, 30-year bonds in
New York in 2008.
Yankee bonds are bonds denominated in US dollars and
issued by a non-US firm in the US.
Dragon bonds are bonds denominated in US dollars and
issued by an Asian (non-Japanese) firm in Asia.
Samurai bonds are yen-denominated bonds sold by non-
Japanese issuers and mainly sold in Japan.
Bulldogs are sterling-denominated bonds issued by non-
British firms and sold in the UK.
6
Eurobonds
Underwritten by international bond syndicates
and sold in general national markets.
McDonalds Corporation issued RMB 200 million in
Hong Kong in 2010
Eurodollar bonds are denominated in US dollars,
underwritten by an international syndicate, and
sold to non-US investors outside the US.
Euro-yen bonds are yen-denominated bonds sold
in the markets outside Japan by international
syndicates.
7
Participating investors
Institutional investors
The minimum investment is too big.
The market is not as liquid as the stock market.
The risk of bond investment could be as much as
equity investment.

8
Characteristics of bonds and
other fixed income securities
9
By type
Bonds
Basic characteristics: terms to maturity, coupon
rate, and face (par) value.
Bondholders usually receive half of the annual
coupon every six months.
10
By type
Preferred stocks
Pay preferred stock dividends unless the company
does not make enough earnings to do so.
Do not have a stated maturity date.
11
By type
Mortgage-backed securities (MBS)
Use a pool of mortgages as collateral.
The mortgage interest generated from the
mortgages is used to pay for the monthly coupon
interest to MBS owners.
12
By rating
Investment grade vs. speculative grade
Government bond: sovereignty risk rating
13
14
Source: Bodie, Kane, and Marcus 2010, Figure 10.8, p. 309
By special provisions
Senior vs. subordinated bonds
Straight vs. convertible bonds
Straight vs. callable bonds
Coupon vs. zero coupon bonds

15
By maturity
Maturity: 1 year or less
marketable securities
Maturity: more than a year but less than 10
notes
Maturity: 10 or more years
bonds
16
Bond quotations
17
Issuer Name Coupon Maturity Rating
Moody's/S&P
High Low Last Change Yield %
MORGAN
STANLEY
5.300% Mar 2013 A2/A 107.228 105.857 106.474 0.015 2.261
CITIGROUP 4.750% May 2015 A3/A 104.446 103.335 103.528 -0.097 3.872
BANK OF AMERICA
CORP
5.625% Jul 2020 A2/A 100.750 97.185 97.347 -0.616 5.994
GENERAL
ELECTRIC CAPITAL
CORP
4.375% Sep 2020 Aa2/AA+ 98.580 95.000 95.846 -0.154 4.916
VALE OVERSEAS 6.875% Nov 2036 Baa2/BBB+ 109.000 107.460 107.560 -1.661 6.280
NEWMONT
MINING CORP
5.125% Oct 2019 Baa1/BBB+ 108.095 106.214 107.214 -0.059 4.136
MORGAN
STANLEY
7.300% May 2019 A2/A 112.373 108.829 109.720 -1.158 5.819
TOTAL CAPITAL SA 2.300% Mar 2016 Aa1/AA 98.000 96.686 96.686 -0.444 2.988
SEAGATE
TECHNOLOGY HDD
HLDG
6.800% Oct 2016 Ba1/BB+ 101.295 100.188 100.500 1.350 6.691
Source: The Wall Street Journal (Dec 15 2010) http://online.wsj.com/mdc/public/page/2_3027-
corpbond.html?mod=topnav_2_3050 (accessed on December 16, 2010)
Quotations of corporate bonds in WSJ.com
Fixed income securities markets
in Hong Kong
18
Short-term money markets
The HIBOR market is basically a short-term
money market for banks dealing in the local
currency.
HIBOR represents the cost of short-term funds
in Hong Kong.
19
Long-term debt market
Government sector is more mature than
corporate sector.
The trading of Exchange Fund bills and notes is
now the most liquid government sector market in
Asia.
Hong Kong Monetary Authority (HKMA) has been
actively involved in the development of the debt
market through improving market infrastructure
and promoting the issue of high-quality debt
instruments.
20
Long-term debt market
For corporate sector, corporations usually issue
debt in the form of convertible bonds or
convertible preferred stocks.
Some companies have issued Eurobonds, Yankee
bonds in the US, or raised funds through
international syndicates.
21
Public debt
Exchange Fund Bills and Notes are the most
actively traded instruments.
To manage liquidity as well as discount them
at the HKMAs Discount Window.
22
Private debt
Commercial paper
Negotiable certificates of deposit (NCDs)
issued by banks for terms of up to three years to
finance high-cost projects.
Corporate bonds
Dragon bonds
Eurobonds
23
The Hong Kong Mortgage Corporation
Purchase portfolios of mortgages or other loans.
Raise financing for its purchase of mortgages
through the issuance of debt securities in capital
markets.
Secure mortgage portfolio by way of issuing
mortgage-backed securities to investors.

24
Return and risk of fixed income
securities
25
Measures of return and risk
26
t period during i bond on accrued or paid interest the
t period of beginning at the i bond of price market the
t period of end at the i bond of price market the
t period during i bond for return period holding the
where
,
,
1 ,
,
,
, , 1 ,
,
=
=
=
=
+
=
+
+
t i
t i
t i
t i
t i
t i t i t i
t i
Int
P
P
HPR
P
P Int P
HPR
Suppose an investor bought a 5-year bond with
8% coupon last year. The face value of the bond
is $1,000. He paid $1,010 for the bond. A year
later, he decided to sell the bond and collected
$1,020. He also received $80 coupon interest
(8%*$1,000). What is his HPR?
27
% 91 . 8
010 , 1 $
010 , 1 $ 80 $ 020 , 1 $
=
+
= HPR
Historical risk and return of bonds among
Asian countries
28
Country
Monthly average (%) Standard deviation (%)
China
0.31 1.03
Hong Kong
0.44 1.05
Indonesia
1.45 3.96
South Korea
0.48 1.00
Malaysia
0.37 0.78
The Philippines
0.97 1.96
Singapore
0.34 1.07
Thailand
0.48 1.91
Source: Asian Bonds Online (2009) http://asianbondsonline.adb.org/spreadsheets/RG-
Asian_Local_bond_RI.xls (accessed on December 16, 2010)
Bond returns among selected Asian countries from Jan 2001 to Sep 2009
Valuation of bonds
29
Basic pricing model
where
P
m
= the current market price of the bond
n = the number of years to maturity
t = timing of each coupon payment
C
i
= the annual coupon payment for bond i
r = the prevailing annual yield to maturity for this bond issue (or the
required annual rate of return for this bond)
P
p
= the par value of the bond.
30
n 2
p
n 2
1 t
t
i
m
)
2
r
1 (
P
)
2
r
1 (
2 / C
P
+
+
(
(
(

+
=

=
A bond with an 8% coupon that pays interest
semiannually, has a par value of $1,000, matures
in seven years, and for which investors believe
that a 6% semiannual interest rate (12% required
rate of return annually) should be required. What
is the bond price?
31
The PV of coupons
= $40 * [(1 - 1/(1.06)
14
)/0.06] = $371.80
The PV of par value
= $1,000 * [1/(1.06)
14
] = $442.30
Bond price
= $371.80 + $442.30 = $814.10
A bond with an 8% coupon that pays interest
annually, has a par value of $1,000, matures in
seven years, and for which investors believe that
a 12% annual interest rate (12% required rate of
return annually) should be required. What is the
bond price?
32
The PV of coupons
= $80 * [(1 - 1/(1.12)
7
)/0.12] = $365.10
The PV of par value
= $1,000 * [1/(1.12)
7
] = $452.35
Bond price
= $371.80 + $442.30 = $817.45
Suppose that a zero coupon bond matures ten
years from now and has a maturity value of
$1,000. Assuming that a return of 10% (5%
semiannually) is required by investors. What is
the bond price?
33
Bond price
= $1,000 * [1/(1.05)
20
] = $376.89
Bond pricing between coupon dates
34
What is the price of a bond with a 6% coupon
bond, 4.75 years remaining to maturity, and a
yield to maturity of 5%? The bond has a par
value of $1,000 and pays coupons
semiannually.
Step 1: Calculate the bond price by round up
the maturity to a whole number.
35
76 . 043 , 1
%) 5 . 2 1 (
000 , 1
%) 5 . 2 1 (
30
10
10
1
0
=
+
+
(

+
=

= t
t
P
Step 2: Make adjustment to the answer in Step 1.
The bond price in Step 1 is 0.25 years more than it
supposed to be, i.e., we take 0.25 year more in the
discounting process.
The correct bond price should be the future value of
the answer in Step 1 for 0.25 year more.
36
57 . 056 , 1
0123 . 1 76 . 043 , 1 %) 5 1 (
25 . 0
0 25 . 0
=
= + = P P
White, Mark A. and Janet M. Todd, 1995. Bond pricing between coupon payment dates
using a no-frills financial calculator. Financial Practice & Education, Vol. 5 Issue 1,
148-152.
Self-test
Calculate the price of a bond with an 8%
coupon bond, exactly 7.25 years remaining to
maturity and a yield to maturity of 6%. The
bond has a par value of $1,000 and pays
coupons semiannually.
37
Bond yields
Yield to maturity
Current yield
38
39
Assume that you purchased an 8%, 20-year,
$1,000 par, semiannual payment bond priced
at $1,012.50. What is the yield to maturity
when the bond has 12 years remaining until
maturity?
Factors affecting the price of a bond
From the basic pricing model, r and n affect
bond price.
Then what will affect r?

40
Page 41
How n affects bond price?
r = coupon rate Market value = Par value Sell at par Par Bond
r < coupon rate
r > coupon rate Market value < Par value Sell below par
Discount
bond
Market value > Par value Sell above par
Premium
Bond
Page 42
Year r = 10% r = 15% r = 20%
0 $1,380.30 $1,000.00 $766.23
1 $1,368.33 $1,000.00 $769.47
2 $1,355.17 $1,000.00 $773.37
3 $1,340.68 $1,000.00 $778.04
4 $1,324.75 $1,000.00 $783.65
5 $1,307.23 $1,000.00 $790.38
6 $1,287.95 $1,000.00 $798.45
7 $1,266.75 $1,000.00 $808.14
8 $1,243.42 $1,000.00 $819.77
9 $1,217.76 $1,000.00 $833.72
10 $1,189.54 $1,000.00 $850.47
11 $1,158.49 $1,000.00 $870.56
12 $1,124.34 $1,000.00 $894.68
13 $1,086.78 $1,000.00 $923.61
14 $1,045.45 $1,000.00 $958.33
15 $1,000.00 $1,000.00 $1,000.00
Changes in Bond Value over Time
Value of a 15-years, 15% coupon, $1000 par value bond over time when
interest rates are 10%, 15%, and 20% respectively
Page 43
$0
$250
$500
$750
$1,000
$1,250
$1,500
1 3 5 7 9 11 13 15
r = Coupon Rate
r < Coupon Rate
r > Coupon Rate
Years
Bond Value
Changes in Bond Value over Time
Page 44
Bond Value over time
Example
Suppose you purchased a 15-years $1000 bond with 15%
annual coupon, the required rate is 10%. If the required
return remains as 10% over the bonds life, what is the HPR
for the first year?
Managing bond portfolios
45
Relationship between yield and bond price
46
Source: Bodie, Kane, and Marcus 2010, Figure 11.1, p.331.
Relationship between yield and bond price
Inverse relationship between bond price and
interest rates (or yields).
Long-term bonds are more price sensitive
than short-term bonds.
Low coupon bonds are more price sensitive
than high coupon bonds.
Sensitivity of bond prices to changes in yields
increases at a decreasing rate as maturity
increases.

47
Relationship between yield and bond price
Bond price volatility is inversely related to
coupon.
Bond price volatility is greater when the yield-
to-maturity is low than when the yield-to-
maturity is high.
An increase in a bonds yield to maturity
results in a smaller price decline than the gain
associated with a decrease in yield
(asymmetrical changes).
48
Relationship between yield and bond price
Expect a major decline in interest rates
Hold bonds with maximum interest rate sensitivity
Expect an increase in market interest rates
Hold bonds with minimum interest rate sensitivity
49
Self-test
As the portfolio manager for a large pension fund,
you are considering the following bonds:
50
Assuming that you expect a decline in interest
rates soon, identify and justify which of the
bonds you would select. Justify your answer
without actually doing the calculations.
Bond Coupon Maturity Price (% of
$1,000)
YTM
X (new issue) 14% 2014 101.75 13.75%
Y (new issue) 6% 2014 48.125 13.60%
Z (1974) 6% 2014 48.875 13.40%
Reinvestment risk
Reinvestment risk
The risk that the investor will not be able to
reinvest the coupons at the promised yield rate.
Short-term bonds have more reinvestment rate
risk than long-term bonds
High coupon rate bonds have more reinvestment
rate risk than low coupon rate bonds

51
52
Consider a new bond issue of 6-year maturity, 8%
annual coupon (pay coupon interest once a year),
a face value of $1,000, and where the market
interest rate for a similar bond is 8%. Hence, the
current bond price is $1,000. An investor bought
the new bond issue for $1,000. For simplicity, let
us assume that there is a one time market
interest rate hike from 8% to 9% and the 9%
market interest rate remains the same for all six
years.
53
14 . 955 $
09 . 1
000 , 1 $
0.09
) 09 . 1 / 1 $80(1
hike rate after the price Bond
6
6
= +

=
Coupon
payment no.
Years remaining
for reinvestment
Value of $80 at the
end of 6
th
year (at 9%)
Value of $80 at the
end of 6
th
year (at 8%)
1 5 $80*(1+9%)
5
$80*(1+8%)
5

2 4 $80*(1+9%)
4
$80*(1+8%)
4

3 3 $80*(1+9%)
3
$80*(1+8%)
3

4 2 $80*(1+9%)
2
$80*(1+8%)
2

5 1 $80*(1+9%)
1
$80*(1+8%)
1

6 0 $80 $80
Total $601.87 $586.87
Coupon reinvestment:
Computing duration
Duration or Macaulay duration
The weighted average of the times until the cash
flows of a fixed income security are received
A measure to summarize the interest rate risk of
bonds
54
price bond
) 1 /(
1
t
t
t
n
t
t
y CF
w
w t D
+
=
=

=
Computing duration
Modified duration (D
m
)

55
y
D
D
m
+
=
1
56
Year (t) Cash flow (C
t
) PV of CF
t
at 10%
[C
t
/(1+y)
t
]
PV of CF
t
* timing of
each cash flow
1 $100 $90.91 90.91*1 = 90.91
2 $100 $82.64 82.64*2 = 165.28
3 $100 $75.13 75.13*3 = 225.39
4 $100 $68.30 68.30*4 = 273.20
5 $100 $62.09 62.09*5 = 310.50
6 $100 $56.45 56.45*6 = 338.70
7 $1,100 $564.47 564.47*7 = 3,951.29
Total $1,000 5,355.27
Let us compute the Macaulay and modified durations of a 7-
year par value bond that has a coupon rate of 10%, assuming
annual coupon. The yield to maturity is 10%.
57
years 87 . 4
0.1) (1
years 5.36
Duration Modified
years 36 . 5
1,000
5,355.57
Duration Macaulay
=
+
=
= =
Characteristics of duration
The duration of a zero coupon bond will equal
its term to maturity.
The Macaulay duration of a bond with coupon
payments will always be less than its term to
maturity.
There is an inverse relationship between
coupon and duration.
Duration is additive: the duration of a
portfolio of securities is the weighted-average
of the durations of the individual securities.

58
Characteristics of duration
Term to maturity and duration are generally
positively related, but duration increases at a
decreasing rate with maturity.
There is an inverse relationship between yield
to maturity and duration.
Call provisions can have a dramatic effect on a
bonds duration.
59
Self-test
Compute the Macaulay and modified
durations of a 7-year par value bond that has
a coupon rate of 10%, assuming semiannual
coupon. The yield to maturity is 10%.
60
Duration and immunization of a bond
portfolio
Duration can be used to insulate bonds from
interest rate risk.
Immunization refers to a strategy of shielding
off interest rate risk of a bond or a bond
portfolio.
Work if the Macaulay duration of the bond (or a
bond portfolio) is the same as the desired holding
period.
61
An insurance company needs to pay out $1,469 in five
years. The chief investment officer of the company
wants to make a bond investment today so that it can
meet the $1,469 future cash outflow five years later.
The officer wants to shield off any interest rate risk.
That is, the money set aside today for the bond must
be sure to meet the $1,469 future cash outflows.
He is considering a new bond issue of 6-year maturity,
8% annual coupon (coupon interest once a year) and a
face value of $1,000. The market interest rate for a
similar bond is 8%. Because the yield and the required
rate of return are the same, the current bond price is
$1,000. He is confident that the bond will meet his
criteria. Why?
62
63
Scenario 1: No change in interest rate
Coupon
payment no.
Years remaining
for reinvestment
Value of each year CF at the end of 5
th

year (at 8%)
1 4 $80*(1+8%)
4
= 108.84
2 3 $80*(1+8%)
3
= 100.78
3 2 $80*(1+8%)
2
= 93.31
4 1 $80*(1+8%)
1
= 86.40
5 0 $80
Sale of the
bond
0 $1,080/1.08 = $1,000
Total $1,469.33
The bond meets the insurance companys cash
outflow obligation.
64
Scenario 2: Interest rate drops from 8% to 7%
Coupon
payment no.
Years remaining
for reinvestment
Value of each year CF at the end of 5
th

year (at 7%)
1 4 $80*(1+7%)
4
= 104.86
2 3 $80*(1+7%)
3
= 98.00
3 2 $80*(1+7%)
2
= 91.59
4 1 $80*(1+7%)
1
= 85.60
5 0 $80
Sale of the
bond
0 $1,080/1.07 = $1,009.35
Total $1,469.40
The bond meets the insurance companys cash
outflow obligation.
65
Coupon
payment no.
Years remaining
for reinvestment
Value of each year CF at the end of 5
th

year (at 8%)
1 4 $80*(1+9%)
4
= 112.93
2 3 $80*(1+9%)
3
= 103.60
3 2 $80*(1+9%)
2
= 95.05
4 1 $80*(1+9%)
1
= 87.20
5 0 $80
Sale of the
bond
0 $1,080/1.09 = $990.83
Total $1,469.61
Scenario 3: Interest rate increases from 8% to 9%
The bond meets the insurance companys cash
outflow obligation.
What is the
magic here?
Self-test
An insurance company must make a payment of $2,158,925 in
10 years. The market interest rate is 8%. Hence, the present
value of the obligation is $1,000,000. The treasurer of the
company wants to fund the obligation today with two coupon
bonds below:
66
Bond A Bond B
Years of maturity 15 20
Coupon 8% 8%
Par value $1,000 $1,000
Coupon payment time Once a year Once a year
Bond price today $1,000 $1,000
Macaulay duration 9.24 10.60
Self-test
67
Explain how the treasurer is able to use Bonds A and B to fund
his companys obligation in ten years without interest rate risk.
Calculate the portfolio composition of the two bonds.
Calculate the number of Bonds A and B that should be
purchased in order to fund the obligation.
Modified duration and bond price volatility
Bond price movements vary proportionally to
modified duration for small changes in yields.
68
Proof (page 60 of Investment Science, David Luenberger)
where
P = the change in price for the bond
P = the beginning price for the bond
D
m
= the modified duration of the bond
y = the yield change in basis point divided by 100.
E.g., if interest rate hikes from 8.00% to 8.50%, y = 0.50%
y D
m
A = 100
P
P
A bond with maturity of 30 years has a
coupon rate of 8% (paid annually) and a yield
to maturity of 9%. Its price is $897.26, and its
modified duration is 11.37 years. What will
happen to the bond price if the bonds yield to
maturity increases to 9.01% and 10%?
69
70
896.324 $ P
$0.9359 - 897.26 $ P
-0.9359 P
01 . 0
09 . 1
37 . 11
100
897.26
P
100
P
P
=
=
=

=
A = y D
m
r=9% to r=9.01%
803.6651 $ P
$93.5949 - 897.26 $ P
-9.359 P
1
09 . 1
37 . 11
100
897.26
P
100
P
P
=
=
=

=
A = y D
m
r=9% to r=10%
Actual Price = $896.328 Actual Price = $811.46
Self-test
A bond with maturity of 25 years has a
coupon rate of 10% (paid semiannually) and a
yield to maturity of 9%. Its price is $1,098.81,
and its modified duration is 9.61 years. What
will happen to the bond price if the bonds
yield to maturity decreases to 8.5%?
71
Major limitations of duration
Accurate only when the yield change is very
small.
Applicable when the yield curve experiences a
parallel shift.
Applicable to straight bond only.
When using duration in immunization, we may
need to make frequent changes to the bond
portfolio if there are many changes in market
interest rates.
72
Bond convexity
Duration is only an approximation.
Duration asserts that the percentage price
change is linearly related to the change in the
bonds yield.
Underestimates the increase in bond prices when
yield falls.
Overestimates the decline in price when the yield
rises.
73
Pricing Error Due to Convexity
74
Source: Bodie, Kane, and Marcus 2010, Figure 11.5, p.345.
Computation of convexity
75
| |
2
2 / 1 y Convexity y D
P
P
A + A =
A

=
(

+
+ +
=
n
1 t
2
t
t
2
) t t (
) y 1 (
CF
) y 1 ( P
1
Convexity
Where: CF
t
is the cash flow (interest and/or principal) at time
t and y = YTM
The prediction model including convexity is:
Proof (page 66 of Investment Science, David Luenberger)
A 10-year bond has 3% annual coupon, 4.5%
yield to maturity, $1,000 par value, and a
bond price of $881.3. What is the convexity of
the bond?
76
77
Time (t) CF PV(CF) at 4.5% t+t
2
(t+t
2
)*PV(CF)
1 30 28.7081 2 57.4163
2 30 27.4719 6 164.8314
3 30 26.2889 12 315.4668
4 30 25.1568 20 503.1368
5 30 24.0735 30 722.2059
6 30 23.0369 42 967.5486
7 30 22.0449 56 1234.5118
8 30 21.0956 72 1518.8799
9 30 20.1871 90 1816.8420
10 1030 663.2455 110 72,957.0064
Total 881.3092 80,257.8458
3924 . 83
045 . 1 3092 . 881
8458 . 80257
2
=

= Convexity
If the change in yield in 25 basis points
(0.25%), the price change due to convexity of
the bond:
78
2
Convexity Price 2 / 1
convexity to due change Price
y A =
23 . 0 $
) 0025 . 0 ( 3924 . 83 3092 . 881 2 / 1
2
=
=
Determinants of convexity
Price-yield curve is more convex at its lower-
yield (upper left) segment.
Inverse relationship between coupon and
convexity (holding yield and maturity constant).
Direct relationship between maturity and
convexity (holding yield and coupon constant).
Inverse relationship between yield and convexity
(holding coupon and maturity constant).
Is convexity good to investors?



79
Self-Test
A 7-year bond has a 10% annual coupon, 10%
yield to maturity, a $1,000 par value, a bond price
of $1,000, and a modified duration of 4.87 years.
Calculate the convexity of the bond.
Calculate the price change on the bond due to
convexity for a 75 basis point decline in the market
yield.
Calculate the combined effect on the bond price
changes due to modified duration and convexity for a
75 basis point drop in the market yield.
80
Bond dedication strategy: Using zero
coupon bonds to achieve a future goal
We would like to have a 30% down payment on a
house valued at $2,000,000 today with a 3%
inflation rate in 8 years. Based on the time value
of money calculation, the target financial goal =
$2,000,000*30%*(1+3%)
8
= $760,000.
The bond yield for a government (or high quality)
zero coupon bond is 8% with a term to maturity
of 8 years. The market price for this zero coupon
bond is $540.27 by taking the PV of $1,000 at an
8% annual rate [i.e. $1,000/(1+8%)
8
].
81
Bond dedication strategy: Using zero
coupon bonds to achieve a future goal
We need 760 zero coupon bonds so that the
matured value of these 760 bonds will be
$760,000.
The amount of money needed to invest today
is $410,605.2 [i.e., 760$540.27].
82
Bond dedication strategy