You are a bond portfolio manager and must chose constituent bonds from only one type within the five categories below. You have a constraint and an objective. You are constrained to hold bonds with maximum maturity of 10 years and your objective is to maximise the portfolios exposure to parallel shifts in the term structure of continuous interest rates.

1.What type of bonds would you chose in your portfolio?

2.What is the maximum (unmodified) duration that your bond portfolio can have (in positive years)?

3.If rates fell in parallel across the continuous yield curve by 0.5% (50 basis points), what is the percentage gain (to 1 decimal place, i.e. 1.0 for 1%) that your portfolio would have? (Answer to 1 decimal place rounding e.g. 1.2 not 1.23% - you should exclude convexity effects in this part and use only duration).

4.What is the maximum convexity your portfolio can have (in years squared)?

5.If rates rose or fell in parallel across the continuous yield curve by 0.5% (50 basis points), what is the additional convexity correction required to adjust the duration estimated change? (Answer to 2 decimal places rounding e.g. 1.23 for 1.23%).