Your company asks you to manage a short-term guaranteed investment contract. The job is to make portfolio that has a 4-year duration.

(a)If you are given the choice of using a 5-year zero coupon bond and a 3-year 8% annual coupon bond with a yield to maturity of 10%, how would you construct your portfolio?

(b)What is the modified duration of that 3-year annual coupon bond in (a)?

(c)If the yield to maturity of that 3-year annual coupon bond decreases to 8.045%, how much percentage change in price would you expect to see using modified duration?