In: Finance
Q. A bank has an obligation to pay $100 million in 10 years. The market interest rate is 8%.
The bank’s CFO wishes to fund the obligation using 5-year zero-coupon bonds and
perpetuities paying annual coupons. How can the CFO finance the obligation using these
bonds while mitigating interest rate risk ? How much should the CFO invest in the two
bonds? If interest rates increase by 20bps, how will it affect our decision?