A 4-year zero coupon bond has a face value of $100 and a price of $85.480. The table below contains prices, coupons and time to maturity for 3 annual coupon paying bonds that have a face value of $100.

Time to Maturity (Years) Annual Coupon Price

1 3.0% $99.038

2 8.5% $108.487

3 6.5% $106.937

Please use 3 decimal places in your working.

2a) What is the price of a 3-year bond paying annual coupons of 4% and a face value of $100?

2b) If you had $1million invested in the 3-year 4% coupon bond, how many of the 4-year zero-coupon bondswould you need to short-sell to hedge your interest rate risk?