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You will be paying $10,000 a year in tuition expenses at the end of the next...

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Finance

You will be paying $10,000 a year in tuition expenses at the endof the next two years. Bonds currently yield 8%. (LO 11-2)

a.

What is the present value and duration of your obligation?

b.

What maturity zero-coupon bond would immunize yourobligation?

c.

Suppose you buy a zero-coupon bond with value and duration equalto your obligation. Now suppose that rates immediately increase to9%. What happens to your net position, that is, to the differencebetween the value of the bond and that of your tuitionobligation?

d.

What if rates fall to 7%?

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Transcribed Image Text

You will be paying $10,000 a year in tuition expenses at the endof the next two years. Bonds currently yield 8%. (LO 11-2)a.What is the present value and duration of your obligation?b.What maturity zero-coupon bond would immunize yourobligation?c.Suppose you buy a zero-coupon bond with value and duration equalto your obligation. Now suppose that rates immediately increase to9%. What happens to your net position, that is, to the differencebetween the value of the bond and that of your tuitionobligation?d.What if rates fall to 7%?

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