Consider Jake wanted to invest in three different bonds. All maturity values are $100. All interest rates are expressed per annum with semi-annual compounding and coupons are paid semi-annually as in the US Treasury bond market.

Bond A: a 6-month zero-coupon bond. The current price is $95.50

Bond B: a 2-year coupon bond with 7 % coupon.

Bond C: a 4-year zero-coupon bond.

The yield curve is currently flat.

1. Compute the yield to maturity on these bonds.

1. What must the price of the 2-year coupon bond (Bond B) be?

1. What is the price of the Bond C?

1. Compute the Modified durations of the three bonds.

1. Suppose Jake wanted to have both portfolio of bonds A and B with the same D^m as that of Bond C, what should the portfolio weights be?

1. Jake expects interest rates to increase by 25 bp (0.25%). What percentage price change does the D^m concept predict for the three bonds?

1. Given these percentage price changes, is there any advantage to being invested in Bond C, as compared to being invested in the portfolio of Bonds A and B as computed in part (5)?