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a) Discuss the four components of return on a bond investment over a given holding period.
b) Consider a bond selling at its par value of US $l 000, with a six year to maturity and a 7% annual coupon rate.
Required:
i) Calculate the bond's duration.
ii) What is the modified duration of the bond?
iii) If the yield to maturity on the bond increased to 8%, what happens to the bonds duration? Why does this change occur?
iv) Why must the duration of a coupon bearing bond always be less than the time to its maturity date?
c) Identify and briefly explain the three conditions that must be satisfied to immunize a portfolio.
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