Question
You will be paying $12,400 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%. a. What is
You will be paying $12,400 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%.
a. What is the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.)
Present value $ 22113
Duration 1.4808 years
b. What is the duration of a zero-coupon bond that would immunize your obligation and its future redemption value? (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Future redemption value" to 2 decimal places.)
Duration 1.4808 years
Future redemption value $ 24,781.71
You buy a zero-coupon bond with value and duration equal to your obligation.
c-1. 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? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Net position changes by $
c-2. What if rates fall to 7%? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Net position changes by $
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