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  3. 1. you will be paying $10,000 a year in tuition ex

1. You will be paying $10,000 a year in tuition expenses at the end of...

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Finance

1. You will be paying $10,000 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 8%.

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

b What maturity and face value of zero-coupon bond would immunize your obligation? Hint: you answer is based on part a.

c 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, the difference between the present value of the zero-coupon bond and that of your tuition obligation? Hint: interest rate change affects both asset and obligation.

d What if rates fall to 7%? Is your portfolio immunized from interest rate risk?

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