Value Modified ($million) Duration Assets 120 6 Bonds 80 7 Loans 40 4 Liabilities 110 12 Surplus 10 (A) If you keep your current asset mix between ($80 million in bonds, $40 million in loans), how many percentage points will the interest rates need to change (increase or decrease) before the surplus becomes negative? (5 marks) (B) As (A), you keep the current asset mix ($80 million in bonds, $40 million in loans) but you are changing the "bond composition" so that the current surplus of $10 million is maintained even if interest rates change. What is the change of modified duration required for new bond composition in order to "immunize" the change in surplus? (5 marks) (C) If you put all of your assets into bonds instead of the current mix, what modified duration will enable you to maintain the current surplus even if interest rates move? (5 marks) (D) Referring to (B) and (C), discuss the pros and cons of lengthening the duration of your bond investments