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

You will be paying $10,000 a year in tuition expenses at the end of 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 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 to 7%?

Expert Solution

jeff jeffy answered 2 years ago

You will be paying $11,000 a year in tuition expenses at the end of the next...

You will be paying $11,000 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? 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 10%. What happens to your net position, that is an increase or decrease in value, to...

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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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