Using the DVO1 (or modified duration), answer the following questions:

a) (5 marks) A bond portfolio manager has $25 million invested in a 5 year zero coupon bond and $100 million invested in a 10 year zero coupon bond. What is the dollar impact of a one basis point parallel shift upwards in the yield curve on the value of the portfolio?

b) (5 marks) Assume now that the bond portfolio contains coupon paying bonds (total of $125 million face value) and the portfolio's modified duration is equal to 8. Using a 10-year zero coupon bond, show how the portfolio manager can hedge the portfolio against interest rate risk (explain how many 10 year zero coupon bonds the portfolio should buy or go short) such that the profit or loss remains the same.