Problem:
You will be paying $10,000 a year in education expenses at the end of the next two years. Currently the yield curve is flat at 8%.
Required:
Question 1: If you want to fully fund and immunize your obligation with a single issue of a zero-coupon bond, what maturity bond must you purchase?
Question 2: What must be the market value and the face value of the zero-coupon bond?
Question 3: Instead of using a single zero-coupon bond, you prefer to use a one-year T-Bill and a five-year zero-coupon bond to fund and immunize your obligation. How much of each security will you buy?
Note: Please provide full description.