Question 3 You will be paying $10,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 4%. In order to compute the present value and the duration of the obligation, we conduct the following calculations:

Period	Time until payment	Payment	Payment discounted at 4%	weight	Time x weight
	(t)	(CFt)	PMT/(1 + y/m)t	(wt = discounted pmt/P)	(t)(wt)
1	1.0	$10,000	9615.3846	0.5098	0.5098
2	2.0	$10,000	9245.5621	0.4902	0.9804
	Column Sums		$18,860.95	1	1.4902
(1) What is the present value and duration of your obligation? (2) What maturity zero-coupon bond would immunize your obligation? (3) Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase to 5%. 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 3%?