You will be paying $8,000 a year in tuition expenses at the end of the next 2
Question:
You will be paying $8,000 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 8%.
a.What is the present value and duration of your obligation?(Do not round intermediate calculations. Round "Present value"to 2 decimal places and "Duration" to 4 decimal places. Omit the "$" sign in your response.)
b.What maturity zero-coupon bond would immunize your obligation (i.e. Duration)? What would be the face value of the zero-coupon bond?(Do not round intermediate calculations.Round "Duration" to 4 decimal places and "Face value"to 2 decimal places.Omit the "$" sign in your response.)
Suppose you buy a zero-coupon bond with value and duration equal to your obligation.
c-1.Now suppose that rates immediately increase to 10%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?(Do not round intermediate calculations. Input the amount as a positive value. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Net Position [increase or decrease?] in value by: ?
c-2.Now suppose that rates immediately falls to 7%. 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 [increase or decrease?] in value by: ?
Expert Answer:
a Present Value and Duration of Obligation Year 1 Present Value PV 8000 1 008 740741 Year 2 PV 8000 ... View the full answer
