Question
You will paying $11,000 a year in tuition expenses at the end of the year for 2 years. Bonds currently yield 8.35%. a What is
You will paying $11,000 a year in tuition expenses at the end of the year for 2 years. Bonds currently yield 8.35%.
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 in dollar (input example: $25,000) and how much of perpetuity bonds in dollar (sample answer: $25,000 ) will you want to hold to both fully fund and immunize your obligation?
Suppose you buy 1-year zero-coupon bonds and perpetuity bonds to immunize your obligation. Now suppose that rates immediately increase to 9%. e. What is your tuition obligation now?
f. What is the value of your position in 1-year-zero-coupon bonds now ?
g. What is the value of your position in perpetuity now ?
Please show work so it can help me understand. Thank you
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