Diego's son, Alfonso, is turning 18 and he is ready to go to college to study mechanical engineering on a scholarship. Diego expects Alfonso to complete his studies, travel for a while, and then set up his own private business 6 years from

PROBLEM 3: Business Financing and Immunization Diego's son, Alfonso, is turning 18 and he is ready to go to college to study mechanical engineering on a scholarship. Diego expects Alfonso to complete his studies, travel for a while, and then set up his own private business ti years from now. Diego has $350,000 in his savings account and plans to use these funds to help Alfonso. Specically, according to the current bud get plan, he expects that Alfonso will need 5 installments of $60,000 every two years starting 6 years from now {that is, E, 8, 10, 12, and 14 years from now}. Diego thinks of these future payments as liabilities and plans to use part of his savings to invest in 5-year and 15-year maturity zero-coupon bonds in order to protect his net worth from interest rate uctuations. Assume that the current term structure is at 2%. 1. What is the present value of Diego's liabilities? 2. How many 5-year and 15-year zero-coupon bonds with face value $1,000 does Diego need to invest in to immunize his net worth? 3. Suppose that Diego immunized his net worth by appropriately investing in the two bonds above. What would Diego's net worth be if the interest rate went up or down by 100 basis points