You are managing a portfolio of $1.0 million. Your target duration is 18 years, and you...

You are managing a portfolio of $1.0 million. Your target duration is 18 years, and you can choose from two bonds: a zero-coupon bond with maturity five years, and a perpetuity, each currently yielding 4%.

a. How much of (i) the zero-coupon bond and (ii) the perpetuity will you hold in your portfolio? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

b. How will these fractions change next year if target duration is now seventeen years? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Expert Solution

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You are managing a portfolio of $1.0 million. Your target duration is 18 years, and you...

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