In: Finance
You will be paying $12,800 a year in tuition expenses at the end
of the next two years. Bonds currently yield 8%.
a. What is the present value and duration of your
obligation? (Do not round intermediate calculations. Round
"Present value" to 2 decimal places and "Duration" to 4 decimal
places.)
b. What is the duration of a zero-coupon bond that
would immunize your obligation and its future redemption value?
(Do not round intermediate calculations. Round "Duration"
to 4 decimal places and "Future redemption value" to 2 decimal
places.)
c. Suppose you buy a zero-coupon bond with value
and duration equal to your obligation. Now suppose that rates
immediately increase to 9%. What happens to your net position, that
is, to the difference between the value of the bond and that of
your tuition obligation? (Enter your answer as a positive
value. Do not round intermediate calculations. Round your answer to
2 decimal places.)
d. What if rates fall to 7%? (Enter your
answer as a positive value. Do not round intermediate calculations.
Round your answer to 2 decimal places.)