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Question - Your firm has an obligation to pay a parts supplier eight equal annual payments of $14,000,000 (the first payment is due 1 year from today). Assume the Treasury yield curve is a flat 4.25%, and today your firm purchases zero-coupon Treasury bonds to fund and immunize the obligation. All bonds that your firm purchases have the same maturity.
a. Calculate the present value and duration of the obligation (carry the duration out to four decimal places).
b. What is the total face value of the bonds your firm buys (In your calculations, make sure you use all 4 decimal places in the duration you calculated in part a).
c. If immediately after purchasing the bonds the yield curve increases to a flat 4.63%, by how much (in dollars) will the obligation be underfunded or overfunded? Be sure to list the dollar amount and to write whether the obligation is underfunded or overfunded.
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