Lets say you are planning for a big vacation in four years. You estimate this exquisite trip will cost you $4000. You plan on investing in bonds to ensure you have the cash on hand when it is time to finance the trip. Say you decided to purchase a 4-year zero-coupon bond that currently yields 7%APR.

What is the price today of $1000 of bond face value?

What happens to your time-4-year cash flow if yields decrease to 5% APR?

What happens to your time-4-year cash flow if yields increase to 9% APR?

How well did this investment strategy manage your interest rate risk?