Using an assumed interest rate of 6%, the present value of this stream of fixed cash outflows is $40 million. You are given $40 million to invest in U.S. Treasury bonds for the pension plan. Your boss insists that you only invest in 1 year and 10 year STRIPS. Your task is to minimize the exposure of the Edison Mills pension fund to unexpected changes in the level of interest rates. Your performance will be evaluated after one year.Assume term structure is flat at 6%. Answer the following questions
.(a) What is duration of your obligation?
(b) Describe –step by step –how you would choose and manage the portfolio of 1-year and 10-year STRIPS to minimize the exposure to interest rate risk.