Suppose your horizon period is six years and you are considering the following investments:

AAA-Rated, 6% coupon bond with annual coupon payments, maturity of 6 years, and Macaulay duration of 5.21 AAA-Rated, 5% coupon bond with annual coupon payments, maturity of 7 years, priced at 94.42 to yield 6%, and Macaulay duration of 6.04 Suppose the applicable yield curve is flat at 6%.

a. Determine the target value at your horizon date and the total return for a classical duration-matching strategy and for a maturity-matching strategy given the following interest rate scenarios:

 The yield curve shifts down to 4% just after you buy the bond and stays there until you reach your horizon date.

 The yield curve stays at 6%.

 The yield curve shifts up to 8% just after you buy the bond and stays there until you reach your horizon date.

b. Comment on the difference between a classical duration-matching strategy and a maturity-matching strategy.

c. Determine the target value at your horizon date and the total return for the duration matching strategy given the yield curve shifts after two years to 4%

and 8%, instead of immediately after you buy the bond. What is the duration of your bond after two years at 4% and 8%? Does it match your remaining horizon? Comment on your findings.