Suppose the term structure is flat, with r = 6%. We have $5,000 in a zero-interest checking account. One year from now we will have to make a payment of $5,300. The only risk-free bond in the market is a two-year bond with the nominal $100, paying semi-annually coupons of 8% on the nominal value. The next coupon is to be paid in exactly six months.

(I) Clearly outline the steps to be taken in order to be immunized with respect to the duration according to the above information.

(II) Suppose you are at the end of 1 year and yields have increased by 1%. Illustrate what the immunization strategy has accomplished.