Prof. Ian Giddy, New York University
The date is 29 May 2005. Jan Bloemhuis, a manager at Tulip Investments, has asked for your help with an analysis of his fixed-income portfolio. On behalf of a pension fund client, Tulip must make a lump sum payment of EUR 43 million in exactly 3 years. To meet this obligation, Tulip has been allocated EUR 40 million to invest. Over the past few days he has purchased four bonds. He has invested an equal amount, EUR 10 million, in each bond. These bonds are as follows:
The Irish Government bond of April 2009
The Deutsche Telecom bond of July 2006
The Repsol bond of May 2010
The HVB bond of September of 2011
More details from the Financial Times here.
1. What is the yield and duration of each bond?
2. What is the portfolio duration and yield?
2. Does the portfolio match Tulip's obligation?
4. Please try to suggest a more suitable portfolio.