Assume That the Yield Curve Is Currently Flat at 12

Essay

Assume that the yield curve is currently flat at 12.5% and that you are considering the following four investments,all of which are currently selling for $100,for a holding period of four years: a series of one-year securities with coupon rate = yield to maturity; a four-year zero-coupon bond; a five-year bond that pays coupons of $12.50 per year; a perpetuity.
a. What is the duration of each investment?
b. Which investment would you choose for complete immunization?
c. Calculate the rate of return on each investment if interest rates go up to 20%; do the same if interest rates go down to 5%. How does this relate to the duration measure in part a?