You will be paying $11,500 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 10%.
a. What is the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places. Omit the "$" sign in your response.)
Present value $
Duration years
b. What maturity zero-coupon bond would immunize your obligation? (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Face value" to 2 decimal places.Omit the "$" sign in your response.)
Duration years
Face value $
Suppose you buy a zero-coupon bond with value and duration equal to your obligation.
c-1. Now suppose that rates immediately increase to 12%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation? (Do not round intermediate calculations. Input the amount as a positive value. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Net position (Click to select)increasesdecreases in value by $
c-2. Now suppose that rates immediately falls 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? (Do not round intermediate calculations. Input the amount as a positive value. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Net position (Click to select)increasesdecreases in value by $