Problem 16-12

You will be paying $11,200 a year in tuition expenses at the end of the next two years. Bonds currently yield 6%.

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.)

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.)

c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase 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.)

net position (increases/decreases) in value by _____

d. What if rates fall immediately to 4%? (Do not round intermediate calculations. Input the amount as a positive value. Round your answer to 2 decimal places.)

Net position (increases/decreases) in value by ______