Problem 2 (30 points) (Z corp) The Z corporation is considering investing in a two-bond portfolio to meet a future obligation Bond 1 is a 7% coupon, 4-year bond. Bond 2 is a 10% coupon 6-year bond. Bond 3 is a 8% coupon, 5-year bond. Assume annual coupon payments, a face value of 100 for both bonds, and annual compounding The annual spot rates are given by s = (7.67%, 8.27%, 8.81%, 9.31%, 9.75% 10.16%). The Z corporation must pay $1 million in 4 years (a) Determine the prices of Bonds 1.2 and 3. (b) Determine the (quasi-modified) durations of Bonds 1.2 and 3. (c) The Z corporation wants to structure the portfolio to meet its obligation and to be immunized against interest rate risk. For tax purposes, the portfolio manager at Z wants to have at least 10% of the portfolio value invested in each of Bonds 1 and 3 (leading to a total of 20% of portfolio value in both bonds). How many shares of each bond should the portfolio have? Problem 2 (30 points) (Z corp) The Z corporation is considering investing in a two-bond portfolio to meet a future obligation Bond 1 is a 7% coupon, 4-year bond. Bond 2 is a 10% coupon 6-year bond. Bond 3 is a 8% coupon, 5-year bond. Assume annual coupon payments, a face value of 100 for both bonds, and annual compounding The annual spot rates are given by s = (7.67%, 8.27%, 8.81%, 9.31%, 9.75% 10.16%). The Z corporation must pay $1 million in 4 years (a) Determine the prices of Bonds 1.2 and 3. (b) Determine the (quasi-modified) durations of Bonds 1.2 and 3. (c) The Z corporation wants to structure the portfolio to meet its obligation and to be immunized against interest rate risk. For tax purposes, the portfolio manager at Z wants to have at least 10% of the portfolio value invested in each of Bonds 1 and 3 (leading to a total of 20% of portfolio value in both bonds). How many shares of each bond should the portfolio have