An investor wishes to be sure she has $20 million in 15 months time. At present, i-year

and 2-year zero-coupon bonds are priced to yield 9.7% pa. The investor sets up a bond

portfolio using the duration-matching principle. Three months after setting up the

portfolio, the yields on both bonds increase to 10.2% pa and then remain at that level for

a further 12 months. Assume that all months are of equal length, that all bonds have a

par value of $100, and that investors may trade any number of bonds, including fractions

of bonds.