Question: You are planning to attend an master level Program that will require payment of $12,000 a year in tuition expenses at the end of each

You are planning to attend an master level Program that will require payment of $12,000 a year in tuition expenses at the end of each year for 2 years. Bonds currently yield 8.35%. a What is the present value of your obligation ? ( sample answer: 25000) b What is the duration of your obligation ? (sample answer: 2.53 years c Suppose you wish to fund your obligation using 1-year zero-coupon bonds and perpetuity bonds. How much of 1-year zero in dollar (input example: 25000) and how much of perpetuity bonds in dollar (sample answer: 25000 ) will you want to hold to both fully fund and immunize your obligation? Suppose you buy 1-year zero-coupon bonds and perpetuity bonds to immunize your obligation. Now suppose that rates immediately increase to 9%. e. What is your tuition obligation now? (sample answer: $25000) f. What is the value of your position in 1-year-zero-coupon bonds now ? (sample answer: 25000) g. What is the value of your position in perpetuity now ? (sample answer: 25000)

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a Present Value of Obligation The present value of an obligation is calculated using the formula for the present value of a cash flow P V C 1 1 r C 2 1 r 2 PV fracC11 r fracC21 r2 PV1rC11r2C2 Where C ... View full answer

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