1. Assume that you have an obligation to pay $1000 at the end of this year and to pay $1500 at the end of the next year. Todays pure yield curve is flat at 5%. To shield this obligation from unexpected changes in interest rates, you should__________________.

1. Buy coupon bonds with maturity of about 1.50 years.
2. Buy zero-coupon bonds with maturity of about 1.70 years.
3. Buy zero-coupon bonds with maturity of about 1.65 years.
4. Buy zero-coupon bonds with maturity of about 1.59 years.

1. A bond has 5-year maturity, 7% coupon rate with annual coupon payment, and $1000 par value. Its yield to maturity is 10%. Its modified duration is about_____________.

1. 4.34 years.
2. 4.22 years.
3. 3.95 years.
4. 3.84 years.