Question
You will be paying $9,000 a year in tuition expenses at the end of the next 3 years. Bonds currently yield 16%. a What is
You will be paying $9,000 a year in tuition expenses at the end of the next 3 years. Bonds currently yield 16%.
a What is the present value of your obligation ? __________________
b What is the duration of your obligation ? ______________________
c Suppose you wish to fund your obligation using 1-year zero-coupon bonds and perpetuity bonds. How much of 1-year zero __________________________ and how much of perpetuity bonds ____________________ (in market value ) will you want to hold to both fully fund and immunize your obligation?
d. Suppose you buy 1-year zero-coupon bonds and perpetuity bonds to immunize your obligation. Now suppose that rates immediately increase to 17%. What is your tuition obligation now? __________________________
BONUS POINTS What is the value of your position in perpetuities now? _________________________ What is the value of your position in 1-year-zero-coupon bonds now?______________
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