On Optimal Design of Treasury Bonds

In this paper we develop a methodology for the study and the optimal design of the Italian medium, long-term Treasury securities. The aim is the determination of the optimal characteristics (coupon, maturity, etc.) of their future issues. Interest rate risk is examined in a way consistent with the issuer’s perspective. When it is impossible to apply some form of duration matching to manage the net asset and the liability portfolio, the minimisation of the cost of the debt and the stability of the debt service payments could be considered as the objectives of the debt issuer. A new model is
proposed for the optimal issue of interest rate sensitive securities. The model is formulated as a bilevel
optimisation problem in which the issuer minimises his loss function and the investor maximises the expected utility of his portfolio.