Considering an immunization portfolio to hedge a 1 million HKD liability 3 years later. You can trade on 5 year 6% treasury bond and 6 months Treasury bill . Assuming a 5% flat yield curve and annual coupon payments.

1. Suppose the yield changes to 6% right after you form the portfolio. Compute market values for the liability and the immunization portfolio now.

2.. Construct your date 0 immunization portfolio.

3. Explain why the modified durations for both liability and immunization portfolio diverge.

4. Suppose you just roll over the 6 months Treasury bill. At the beginning of year 3, what is the modified duration for the liability? What is the modified duration for the immunization portfolio? (3 points)