1. Consider a bond that has a coupon of 8% paid annually and has a maturity of 5 years. The bond is currently selling for $1,047.34, which means its YTM is 6.85%.

1. Compute its duration.
2. If interest rate (YTM) is expected to increase by 75 basis points, what is the expected dollar change in price? Percentage change in price?
3. Using duration to obtain approximate answers for question (b).

2. You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity, each currently yielding 5%.

1. How much of each bond will you hold in your portfolio?
2. How will these fractions change next year if target duration is now 9 years?