You are managing a bond portfolio of $4 million. your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity 7 years, and perpetuity with a yield of 10%.
A) How much perpetuity (in $) will you hold in your portfolio?
B) Suppose afer one year, you decide to change your portfolio target duration to 9 years. How much perpetuity (in $) will you hold in your portfolio? Suppose the value of your portfolio is now worth $5 million.
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