A.4. A portfolio manager (for example the manager of a Fixed Income Mutual Fund) holds the following securities in her portfolio and wishes to know the interest rate risk of each individual security and of the portfolio. The yield curve is flat at 5%. These are the securities in the portfolio that the manager holds: - TYPE 1: 3-year bonds, annual coupon rate of 6% and face value equal to 1,000. - TYPE 2: Spanish Treasury bills with repayment in 6 months. - TYPE 3: strips with repayment in 5 years at 120% and face value equal to 10,000. (a) Compute the volatility and the duration of each security. (b) Determine which security has the highest sensitivity to interest rate changes. (c) If the weight of TYPE 1 in the portfolio is 25%, the weight of TYPE 2 in the portfolio is 30% and the remainder is invested in TYPE 3 , can you compute the percent change in the portfolio value of an increase in interest rates of 1% (across all maturities)? Hint: Take into account that the duration of the portfolio is the weighted average of the individual durations