You will be paying $12,200 a year in tuition expenses at the end of the next two years. Bonds currently yield 9%. Required: a. What are the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.) b. What is the duration of a zero-coupon bond that would immunize your obligation and its future redemption value? (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Future redemption value" to 2 decimal places.) c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. 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? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately falls to 8%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?

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
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You will be paying $12,200 a year in tuition expenses at the end of the next two years. Bonds currently yield 9%. Required: a. What are the present value and duration of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.) b. What is the duration of a zero-coupon bond that would immunize your obligation and its future redemption value? (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Future redemption value" to 2 decimal places.) c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. 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? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately falls to 8%. 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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