The term structure is flat at a rate of 6%. You are currently managing the portfolio of bonds listed below:
long 500 of 6.5% coupon bonds t = 4 (maturity date)
long 1,000 of 8.0% coupon bonds t = 3
short 800 of 8.5% coupon bonds t=5
a. If interest rates rise by .5%, what is the estimated effect of that change on the value of your portfolio?
b. You wish to reconfigure the relative positions in the 6.5% and 8.0% bonds to make your portfolio insensitive to small rate changes. How would you accomplish this goal?