In: Finance
You will be paying $10,200 a year in tuition expenses at the end
of the next two years. Bonds currently yield 9%.
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 10%. 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 8%? (Enter your
answer as a positive value. Do not round intermediate calculations.
Round your answer to 2 decimal places.)