Please upload your calculations (e.g., an Excel spreadsheet, a Word document, a PDF file, or a picture of your work) for Q21.

Q21. Consider a 2-year bond. The coupon rate of the bond is 10%, and the bond pays coupons semiannually. The bond is selling at a yield to maturity of 8.0% annually, or 4.0% semi-annually.

(a) What is the duration of the bond measured in half-years and in years? (10 points)

(b) If the semi-annually yield changes from 4.0% to 5.0%, what is the predicted change in the price of the bond (a dollar amount) using duration? (7 points)

(c) Suppose you are the company that is issuing this coupon bond. To immunize your liability, you would like to invest in a portfolio consists of one-year zero-coupon bonds and three-year zero-coupon bonds. What are the durations of the one-year zero and the three-year zero, respectively? What weight of the one-year zero will you need to hold for immunization? (5 points)