Question 4 [20 marks] a) Bond A is a 4% coupon (paid semi-annually) with 3 years to maturity and $100 face value per contract. The yield curve is flat at 8% per annum.

i) Compute the bond's Macaulay Duration. ii) Compute the bond's Modified Dollar Duration. b) Yield curves take various shapes, therefore, it is important to understand why these yield curves shift and change slope over time. There are a number of theories and hypotheses of interest rate determination that attempt to explain their shape. Identify and describe three (3) of these theories or hypotheses giving examples of each.