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Your portfolio consists of a two-year zero-coupon bond with a face value of $1,000 and a 10-year zero-coupon bond with a face value of $5,000.
Your portfolio consists of a two-year zero-coupon bond with a face value of $1,000 and a 10-year zero-coupon bond with a face value of $5,000. The term structure of interest rates is as follows. Use continuous compounding to:
a.Compute duration and convexity for this portfolio.
b.Use duration and convexity to predict the return to your portfolio if interest rates increase by 1%.
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