Case study

A Barbell for Gold's Gym

by Professor Ian H. Giddy
New York University

Tory Ettinger is the assistant treasurer of Gold's Gym, a worldwide network of fitness centers based in Venice, California. The company is about to be taken over by Novartis, the Swiss health services company. The good news is that Tory will keep her position. However, as a sort of test, the Basel-based Novartis treasury department has given her a challenge.

A year ago, Gold's Gym issued a 5-year, $50 million annual-pay bond to a private investment fund. The bond paid a coupon of 8% but in today's market the yield on equivalent debt would be in the region of 9%. Novartis wanted to take all debt off Gold's balance sheet. They have been able to negotiate repayment of the bank loans, but the bond investors have no interest in getting repaid at a discount.

Novartis has asked Ettinger to work out how the debt could be immunized. They are prepared to set aside $50 million, to be invested in risk-free securities for this purpose. Tory's task is to work out how this could be done. Initially the money will be invested in 3-month Treasurys. Tory knew that this entialed a duration mismatch, and she thought that most of the money should be invested in 5-year zero coupon Treasury bonds. But how much? Was this the best use of the money, or should she consider other Treasury investments?

Novartis' goal is to match the assets (the Treasurys) to the liability (the Gold's bond). Ettinger's first task is to look at the pricing, duration and risk characteristics of the bond itself. She could get this at the following web site:

The yield on 3-month Treasury bills can be found at

Next, the prices and yields of zero-coupon U.S. Treasury bonds ("Strips"), up to about 5 years maturity, are needed. These can be obtained from's screener tool on the same Yahoo page.

With these data sources, Ettinger should be able to find a portfolio of Treasury bills and 5-year Treasury strips that immunize the Gold's bond. Knowing that the duration of a portfolio is simply the weighted duration of all the bonds in the portfolio, she can match the asset-side duration to the liability-side. With luck, there would be excess cash that could be sent back to Switzerland.

  • Can you help Tory Ettinger find the "barbell strategy" -- a short-term plus a long-term bond -- that duration-matches the company's liability?
  • Is this the best use of Novartis' money? Why or why not? | | | | contact
Copyright ©2005 Ian Giddy. All rights reserved.