Exercise 6 Q Search Consider a market with two bonds, with the following characteristics: Bond 1: PV=$1,000; Adjusted Duration = 4 years Bond 2: PV=$5,000; Adjusted Duration = 7 years. Consider also an investor who builds a portfolio made of A units of bond 1 and 8 units of bond 2. 1- What is the return for each bond if interest rates decrease by 200 basis points? 2- If A and B are positive, can the adjusted duration of the portfolio be larger than 7 years? Lower than 4 years? Explain. Consider now that B-1. 3- How many units of bond 1 should the investor hold if he targets an adjusted duration of 5 years for his portfolio? 4 How many units of bond 1 should the investor hold if he targets an adjusted duration of 2 years for his portfolio? 5- How much does the investor lose if he holds only 1 unit of bond 2 and interest rates increase by 100 basis points ? 6 Assume now that the investor wants to lose exactly 6% on its portfolio if interest rates increase by 100 basis points. How should he choose A? 7 Assume now that the investor wants to lose no more than 5.5% on its portfolio if interest rates increase by 100 basis points. How should he choose A? 6