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You are managing a portfolio of $2.5 million. Your target duration is 12 years, and you can choose from two bonds: a zero-coupon bond with

You are managing a portfolio of $2.5 million. Your target duration is 12 years, and you can choose from two bonds: a zero-coupon bond with maturity 5 years, and a perpetuity, each currently yielding 8%.

A. How much of each bond will you hold in your portfolio?

B. How will these fractions change next year if target duration is now ten years?

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