Consider a portfolio that consists of a two-year zero-coupon bond with face value of $100 and a six-year zero-coupon bond with face value of $260. Assume that the term structure is flat. The current yield on all bonds stands at 5% per annum (continuously compounded).

a) Compute the duration and convexity of this portfolio.

b) Compute the change in the value of the portfolio for a 1-percentage-point per annum increase in yields. Compare your result with the change predicted using duration. Discuss.

c) Compute the change in the value of the portfolio for a 5-percentage-point per annum increase in yields. Compare your result with the change predicted using duration and with the change predicted using both duration and convexity. Discuss.