You will be paying $9,600 a year in tuition expenses at the end of the next 2
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Question:
You will be paying $9,600 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 8%.
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.
C1)Now suppose that rates immediately increase to 10%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?
C2)Now suppose that rates immediately falls to 7%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?
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