Suppose you have bough the above zero-coupon bond, with value and duration equal to your obligation. Now suppose the rates immediately increase to 9%. What happens to your net position? How much is the tuition obligation? How much is the zero-coupon bond? How much is the net position?
Suppose you have bough the above zero-coupon bond, with value and duration equal to your obligation. Now suppose the rates immediately increase to 9%. What happens to your net position? How much is the tuition obligation? How much is the zero-coupon bond? How much is the net position?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I need assistance with the following:
Suppose you have bough the above zero-coupon bond, with value and duration equal to your obligation. Now suppose the rates immediately increase to 9%.
- What happens to your net position?
- How much is the tuition obligation?
- How much is the zero-coupon bond?
- How much is the net position?
Transcribed Image Text:You will be paying $10,000 a year in tuition expenses at the end of the next two years.
Currently, the bond current yield is 8%.
a. What is the present value and duration of your obligation?
b. What maturity zero-coupon bond would immunize your obligation. Hint: find a
zero-coupon bond with the same present value that matures at the duration of
tuition payment. The bond maturity could be in factional years.
Suppose you have bough the above zero-coupon bond, with value and duration equal to
your obligation. Now suppose the rates immediately increase to 9%.
c. What happens to your net position?
1. How much is the tuition obligation?
2. How much is the zero-coupon bond?
3. How much is the net position?
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