Assume that the spot rate curve is flat at 5% (annual compounding). Consider the following two government bonds. The first is a 5-year bond with an annual coupon of 5%. The second is a 10-year bond with an annual coupon of 5%.

Part A: For each of the two bonds, calculate the price, Macaulay duration, and modified duration.

Part B: Now suppose that you have a $100 million long position in the

Part C: After putting on your hedge, the spot curve shifts down by 10 basis points across all maturities.

What are the new prices of the two bonds? What is the profit/loss on your hedged portfolio?

Part D: Now suppose that instead the spot curve shifts down by 100 basis points to 4% across all maturities.

What are the prices of the two bonds and the profit/loss on your hedged portfolio in this case?