You will be paying $10,000 a year in tuition expenses at the end of the next 2
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You will be paying $10,000 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?
c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. 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? What if rates fall to 7%?
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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a PV of the obligation 10000 x Annuity factor 8 2 1783265 1 2 3 4 5 Time until Payment years Cash Fl...View the full answer
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