A firm has a single liability of $5.9 million due on 30 June 2018. Time now is 27 June 2012. The firm builds a portfolio of the following two bonds to earn a sufficient rate of return to pay off the obligation. The annual coupon bond pays coupons at end of June each year. (a) Find the cashflow yield of the bond portfolio. (b) What is the projected total value of the bond portfolio on 30 June 2018? Is this sufficient to fund the liability? (c) Compute the Macaulay duration and also the dispersion of the cash-flow payments. Hence find the convexity. (d) Discuss if structural interest rate risk may affect or not affect the projected total cash flows on30 June 2018?

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