Immunization

You will be paying $10,000 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 8%.

a. What is the present value and duration of your obligation? (5 points)

b. What maturity zero-coupon bond would immunize your obligation? (5 points)

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? What if rates fall to 7%? (5 points)