As corporate treasurer, you have to pay $21 million in one year and again in two years. Bonds of all maturities currently yield 7%.

a) What is the duration of the liability?

b) If you buy zero-coupon bonds with a maturity equal to the duration calculated in the previous part, what should be their combined face value (in $)?

c) If interest rates suddenly go up to 8%, what is your immediate funding surplus (positive number) or shortfall (negative number) (in $)? Use the exact duration, not the rounded one shown as solution to part 1.

d) If interest rates suddenly go down to 6%, what is your immediate funding surplus (positive number) or shortfall (negative number) (in $)? Use the exact duration, not the rounded one shown as solution to part 1.