1. A floater with $100 face value pays semi-annually. Three months before payment of the next coupon of 4%, interest rates flatten at 4.2%.

a. What is the value of the floater? b. What is the floaters duration?

2. An investor wishes to purchase a 4%-coupon bond (paying semi-annually) and finance the purchase with a 6-month floating-rate loan; interest rates are flat at 4% (semi-annually compounded).

a. What is the initial value of the portfolio? b. What are the durations of the fixed-rate bond and of the floater? c. What is the duration of the portfolio? What is the dollar loss for every 1bp increase in rates?