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What is the present value and duration of your obligation

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You will be paying $10,700 a year in tuition expenses at the end of the next two years. Bonds currently yield 10%.

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.)

Present value $________

Duration ________ years

b. What is the duration of a zero-coupon bond that would immunize your obligation and its future redemption value? (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Future redemption value" to 2 decimal places.)

Duration: ________years

Future redemption value: $_________

You buy a zero-coupon bond with value and duration equal to your obligation.

c-1. Now suppose that rates immediately increase to 11%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Net position changes by: $________

c-2. What if rates fall to 9%? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Net position changes by: $________

Reference no: EM131357375

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