You will be paying $11,200 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 6%.

a.

What is the present value and duration of your obligation?

b.

What maturity zero-coupon bond would immunize your obligation?

Suppose you buy a zero-coupon bond with value and duration equal to your obligation.

c-1.

Now suppose that rates immediately increase to 8%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?

c-2.	Now suppose that rates immediately falls to 4%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?