Below are two portfolios with a market value of $500 million. The bonds in both port- folios

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Below are two portfolios with a market value of $500 million. The bonds in both port- folios are trading at par value. The dollar duration of the two portfolios is the same. Bonds Included in Portfolio I Issue Years to Maturity ParValue (in millions) ABCD 2.0 $120 2.5 130 20.0 150 20.5 100 - Bonds Included in Portfolio II BFG E 9.7 10.0 10.2 $200 230 70

a. Which portfolio can be characterized as a bullet portfolio?

b. Which portfolio can be characterized as a barbell portfolio?

c. The two portfolios have the same dollar duration; explain whether their per- formance will be the same if interest rates change.

d. If they will not perform the same, how would you go about determining which would perform best assuming that you have a six-month investment horizon?AppendixLO1

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