You will be paying $11,500 a year in tuition expenses at the end of the next two years. Bonds currently yield 10%.

Required:

1. What are 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 12%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?

4. What if rates fall immediately to 8%?