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What is the present value and duration of obligation

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You will be paying $10,000 a year in tuition expenses at the end of each of the next two years. Bonds currently yield 7%.

Problem a. What is the present value and duration of your obligation?

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

Problem 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? What if rates fall to 6%?

Reference no: EM132696666

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