You are given information on cash flow streams for assets 1, 2 and 3.
Cash flows at any times not listed in the first column are assumed to be zero.
Time (Years) Asset 1 Asset 2 Asset 3
(1) (3 points) Compute the modified duration for the cash flows associated with each
of the three assets.
(2) (3 points) Compute the modified convexity for the cash flows associated with
each of the three assets.
(3) (1 point) If you expect that interest rates are likely to decrease, is there one of
the three assets that you would recommend investing in?
(3) (1 point) If you expect that interest rates are likely to increase, is there one of
the three assets that you would recommend investing in?
(4) (2 points) You are now restricted to investments only in Asset 2 or Asset 3. If
you expect that interest rates are going to be fairly volatile but you do not know the
direction of interest rate movement, is there one of the two assets (Asset 2 or Asset
3) that you would recommend investing in?
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