whether to buy and hold a 10 year par bond with yield of 1.76% or to purchase a duration equal portfolio of 2 year par bond with yield of 0.79% and a 30 year par bond with yield of 2.64%. i) Calculate the cost of convexity associated with the 2 + 30 portfolio. ii) Provide an estimate of the market?s expectation of the volatility of interest rates. (Hint: this requires the convexity of the par bonds to be calculated).
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