Question: You will be paying $11,200 a year in tuition expenses at the end of the next 2 years. Bonds currently yield 6%.
a. What is the present value and duration of your obligation?
b. What maturity zero-coupon bond would immunize your obligation?
Suppose you buy a zero-coupon bond with value and duration equal to your obligation.
c-1. Now suppose that rates immediately increase 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?
c-2. Now suppose that rates immediately falls to 4%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?