The following excerpt is taken from an article titled "Eagle Eyes High-Coupon Callable Corporates" that appeared in the January 20, 1992, issue of BondWeek, p. 7:

If the bond market rallies further, Eagle Asset Management may take profits, trading $8 million of seven- to 10-year Treasuries for high- coupon single-A industrials that are callable in two to four years accord- ing to Joseph Blanton, senior v.p. He thinks a further rally unlikely, however.... The corporates have a 95% chance of being called in two to four years and are treated as two- to four-year paper in calculating the duration of the portfolio, Blanton said...."

a. Why is modified duration an inappropriate peasure for a high-coupon callable bond?

b. What would be a better measure than modified duration?

c. Why would the replacement of 10-year Treasuries with high-coupon callable bonds reduce the portfolio's duration?AppendixLO1