Consider two bond portfolios: Portfolio 1 contains 50,000 in market value of 3 year zero coupon bonds yielding 4%, and 50,000 in market value of 7 year zero coupon bonds yielding 4%. Portfolio 2 contains 100,000 in market value of 5 year zero coupon bonds yielding 4%.

(a) What is the modified duration of each portfolio?

(b) Which portfolio has the greater amount of convexity and why?

(c) If you were convinced that any yield curve shifts that occurred in the future would be strictly parallel shifts in the curve, which portfolio would you prefer? Why?