A fixed income manager wants to create a portfolio of risk-free coupon bonds that will generate a guaranteed (certain) rate of return over the next 5 years. Assume that the term structure of interest rates is “flat” and can only change by means of parallel shifts. Assume continuous compounding. How should the portfolio manager construct the portfolio?
A) Set the duration of the portfolio equal to 5.
B) Set the convexity of the portfolio equal to 5.
C) Buy bonds that mature in exactly 5 years.
D) Buy bonds that mature before 5 years.
