Consider a bond portfolio worth $40mil with DV01 equal to $4, 000 and dollar convexity equal to $100 mil. Two bonds are available for trading, both with principal 100: bond 1 with value 103, duration 2.5 and convexity 10; and bond 2 with value 105, duration 3 and convexity 8.

(i) (3 points) By how much would the value of the portfolio change if the yield curve moves up by 20 basis points?

(ii) (4 points) How do you immunize the portfolio? (iii) (1 point) By how much would the value of the immunized portfolio change if the yield curve moves up by twenty basis points?