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Suppose that a pension fund has to make a payment of $1 millionin 2 years time. It can hold a one year pure discount bond thatwill pay $1000 in 1 year; or a 3 year bond that will pay a couponof $100 each year, will be redeemed for $1,000 at the end of thethird year. The yield on each bond is 15%. (a) What is the price ofeach bond? (b) What is the duration of each bond. (c) How much ofeach bond should the fund hold to immunize itself against interestrate risk? Explain.
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