Start with the following table of zero-coupon bonds Maturity Yield 5% 2 years 5 years 0 10 years 0 The strategy is based on buying the 2-year and 10-year bonds and shorting the 5-year bond. It will end up having a positive convexity. The relative amounts to invest in each bond are given by the two constraints (1) It should be (modified) duration neutral. That is, construct the strategy such that the dollar value of your short position times the modified duration of your short position is equal to the dollar value of your long position times the modified duration of your long position. Thus, it is hedged against small (level) changes in yields. (This is the constraint from a number of the examples given in class (2) It should be "cash neutral". That is, the initial value of the short position should equal the initial value of the long pos ition. 1. Calculate the modified durations of the 2-year, 5-year, and 10-year bonds 2. Suppose you short $1,000 in face value of the 5-year bond. First, calculate the market value of the 5-year bond. Denote x to be the amount (market value) of the 2-year bond that you buy and z the amount (market value) of the 10-year bond you buy. Write down the two equations for the two constraints given above. 3. Solve the two equations for x and z. These are the market values of the 2-year and 10-year bonds that you buy in this strategy. What is the face value of the 2-year and 10-year bonds that you buy