A 2-year default-free straight-coupon bond has annual coupons of $8 per $100 of face value.

Assume that a default-free zero-coupon bond with one year to maturity sells for $90 per $100 of face value and that a default-free zero-coupon bond with two years to maturity sells for $80 per $100 of face value.

a. What is the no-arbitrage price of the straightcoupon 8 percent bond?

b. What is the present value duration of the straight-coupon bond given the market value of the bond computed in part a?

c. Assume you hold $1 million face value of the straight-coupon bond. How much in market value of a 3-year, zero-coupon bond should you hold (in addition to the straight-coupon bond position) to have an overall position that is perfectly hedged against a parallel shift in the term structure?

AppendixLO1