You will be paying $10,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%.

a. What are the present value and duration of your obligation?

b. What maturity zero-coupon bond would immunize your obligation?

c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?

d. What if rates fall immediately to 7%? P-963