What is the present value and duration of your obligation

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Question: You will be paying $11,200 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 6%.

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

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

Suppose you buy a zero-coupon bond with value and duration equal to your obligation.

c-1. Now suppose that rates immediately increase to 8%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?

c-2. Now suppose that rates immediately falls to 4%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?

Reference no: EM132031200

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