Business, 20.02.2020 18:57 russboys3

You will be paying $10,300 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%.
a. What is the present value and duration of your obligation?

b. What is the duration of a zero-coupon bond that would immunize your obligation and its future redemption value?
You buy a zero-coupon bond with value and duration equal to your obligation.
c-1. 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?

c-2. What if rates fall to 7%?

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You will be paying $10,300 a year in tuition expenses at the end of the next two years. Bonds curren...

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