a) Suppose you expect interest rates to increase and must choose between two portfolios with the following characteristics: 16 years Portfolio X Portfolio Y Average maturity 17.5 years Average yield to maturity 9% 6% Modified duration Convexity 33.7 86.4 Call features Deferred call features Non-callable ranging from 1 to 6 years 7.2 years 9.5 years Select one of the two portfolios and justify your selection. (15 marks) b) What is the essence of yield curve strategies? Briefly describe at least two approaches used by active bond portfolio managers following yield curve strategies. (15 marks) c) Explain the components of interest rate risk faced by a bond holder. Discuss the classical immunization approach to restructuring a bond portfolio to protect against such risk. (20 marks) [TOTAL: 50 marks]