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Q. A bank has an obligation to pay $100 million in 10 years. The market interest...

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?

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