Question 1 Consider investing in two different bonds. All maturity values are $1000. 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 2-year coupon bond with 3 % coupon with the price of $1001 Bond B: a 4-year 2.5%-coupon bond. The yield curve is currently flat. 1. Compute the yield to maturity on these bonds. 2. What must the price of the 4-year coupon bond (Bond B) be? 3. Compute the Modified durations of the two bonds. 4. Suppose you want to create a portfolio of bonds A and B with duration of 3 years. What are the weights of each bond? 5. You expect interest rates to increase by 25 bp (0.25%). What percentage change in the value of your portfolio in (4)? 6. Suppose that the Eurodollar futures that matures in 3 months is quoted at 99.69. Use this contract to shorted duration of your portfolio to 1 year