Chapter 16, Problem 12PS

Summary Introduction

(A)

Adequate information:

Tuition fee obligation-$10000
Interest rate- 8%

To calculate:

The present value of obligation and duration of obligation

Introduction:

The present value of obligation refers to the sum of all cash flow at a given interest rate received/paid after n years.

Summary Introduction

(B)

To calculate:

The time period at which zero coupon bond will immunize the tuition fee obligation.

Introduction:

The time to immunize zero Coupon bond is that which has the maturity matching with investor's time horizon.

Summary Introduction

(B)

To calculate:

The net position of Zero Coupon Bond when interest factor increases to 9%

Introduction:

The Net position refers to the difference between present value of tution fee obligation due to change in interest rate and present value of bond

Summary Introduction

(D)

To calculate:

the net position if the rate decreases to 7%

Introduction:

The Net position refers to the difference between present values of tuition fee obligation due to change in interest rate and present value of bond