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Unformatted text preview: of the zero-coupon bond, so that we find w by solving: (w 5) + [(1 w) 21] = 10 w = 11/16 = 0.6875 Therefore, the portfolio will be 11/16 invested in the zero and 5/16 in the perpetuity. b. The zero-coupon bond will then have a duration of 4 years while the perpetuity will still have a 21-year duration. To have a portfolio with duration equal to nine years, which is now the duration of the obligation, we again solve for w: (w 4) + [(1 w) 21] = 9 w = 12/17 = 0.7059 So the proportion invested in the zero increases to 12/17 and the proportion in the perpetuity falls to 5/17....
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This note was uploaded on 04/09/2012 for the course FIN 431 taught by Professor Sun during the Spring '12 term at Old Dominion.
- Spring '12