You will be paying $9,500 a year in tuition expenses at the end of the next...

You will be paying $9,500 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?

b. What maturity zero-coupon bond would immunize your obligation?

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?

d. What if rates fall immediately to 7%?

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

PV FACTOR = 1/(1+r)^n

jeff jeffy answered 1 year ago

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You will be paying $9,500 a year in tuition expenses at the end of the next...

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