A portfolio manager at Superior Trust Company is structuring a fixed-income port- folio to meet the objectives of a client. This client plans on retiring in 15 years and wants a substantial lump sum at that time. The client has specified the use of AAA- rated securities. The portfolio manager compares coupon U.S. Treasuries with zero-coupon stripped U.S. Treasuries and observes a significant yield advantage for the stripped bonds: Coupon U.S. Treasuries Zero-Coupon Stripped U.S. Treasuries Term (Years) 3 5.50% 5.80% 6.00 6.60 6.75 7.25 10 7.25 7.60 15 7.40 7.80 30 7.75 8.20 Briefly discuss why zero-coupon stripped U.S. Treasuries could yield more than coupon U.S. Treasuries with the same final maturity.
A portfolio manager at Superior Trust Company is structuring a fixed-income port- folio to meet the objectives of a client. This client plans on retiring in 15 years and wants a substantial lump sum at that time. The client has specified the use of AAA- rated securities. The portfolio manager compares coupon U.S. Treasuries with zero-coupon stripped U.S. Treasuries and observes a significant yield advantage for the stripped bonds: Coupon U.S. Treasuries Zero-Coupon Stripped U.S. Treasuries Term (Years) 3 5.50% 5.80% 6.00 6.60 6.75 7.25 10 7.25 7.60 15 7.40 7.80 30 7.75 8.20 Briefly discuss why zero-coupon stripped U.S. Treasuries could yield more than coupon U.S. Treasuries with the same final maturity.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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2 - A pontfolio manager at Superior Trust Company is structuring a fixed-income port- folio to meet the objectives of a client. This client plans on retiring in 15 years and ‘wants a substantial lump sum at that time. The client has specified the use of AAA- rated securities. The portfolio manager compares coupon U.S. Treasuries with zero-coupon stripped U.S. Treasuries and observes a significant yield advantage for the stripped ‘bonds: Coupon Zero-Coupon Stripped Term (Years) U.S. Treasuries U.S. Treasuries —_— 3 550% 5.80% 5 6.00 660 7 675 725 10 725 7.60 15 7.40 780 30 7.75 820 Mydamuwhymwsfiwdu&mmm“_ ‘coupon U.S. Treasuries with the same final maturity. 3
Transcribed Image Text:A portfolio manager at Superior Trust Company is structuring a fixed-income port-
folio to meet the objectives of a client. This client plans on retiring in 15 years and
wants a substantial lump sum at that time. The client has specified the use of AAA-
rated securities.
The portfolio manager compares coupon U.S. Treasuries with zero-coupon
stripped U.S. Treasuries and observes a significant yield advantage for the stripped
bonds:
Coupon
U.S. Treasuries
Zero-Coupon Stripped
U.S. Treasuries
Term (Years)
3
5.50%
5.80%
6.00
6.60
6.75
7.25
10
7.25
7.60
15
7.40
7.80
30
7.75
8.20
Briefly discuss why zero-coupon stripped U.S. Treasuries could yield more than
coupon U.S. Treasuries with the same final maturity.
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