Question
You will be paying $35,616 a year in tuition expenses at the end of each of the next 2 years. Bonds currently yield 5%. (a)
You will be paying $35,616 a year in tuition expenses at the end of each of the next 2 years. Bonds currently yield 5%.
(a) Calculate the present value and duration of your obligation. (4 marks)
(b) Find the maturity of the zero-coupon bond that would immunise your obligation. (2 marks)
(c) Find the face value of that zero-coupon bond. (2 marks)
(d) Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately decrease to 4%. Determine what happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation. (4 marks)
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