4 Immunization and bond financing Consider a firm that needs to finance an investment project. The firm's project will generate cash flows every six months for six years. The first tour payments the fhrm will receive will be $100, 000, the next four will be $200, 000, and the final four payments will be $300, 000. The cost of the investment is $1,979, 503 and the (continuously compounded) yield curve is flat at 5%. 1. The investment project's cash flow can be thought as a portfolio. What is the duration of this portfolio? 2. The firm will issue a 10-year bond with semiannual 5% coupons to finance part of the investment. What is the duration of this bond? The remaining part will be financed using short-term (zero duration) borrowing 3. Suppose a fraction x of the project is financed via the 10-year bond and the rest (1- r) is financed via short-term borrowing. What is the duration of the firm's total liabilities? Note: the portfolio of its liabilities consists of a 10-year bond and short-term borrowing. 2