You will be paying $12,000 a year in tuition expenses at the end of the...
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Finance
You will be paying $12,000 a year in tuition expenses at the end of the next three years. Bonds currently yield 5%. Suppose that you would like to immunize your future tuition obligations against any interest rate risk. You have the present value of your tuition expenses in a bank account and decided to invest it in a zero-coupon bond.
a. What is the duration and present value of zero-coupon bonds that would immunize your obligation?
b. Suppose that rates immediately increase to 6%. What would be the percentage change in price of the zero-coupon bond based on the duration formula? What would happen to the present value of your tuition obligation?
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