You will be paying $10,700 a year in tuition expenses at the end of the next two years. Bonds currently yield 10%.
a. What is 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.)
Present value $________
Duration ________ years
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.)
Duration: ________years
Future redemption value: $_________
You buy a zero-coupon bond with value and duration equal to your obligation.
c-1. Now suppose that rates immediately increase to 11%. 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.)
Net position changes by: $________
c-2. What if rates fall to 9%? (Enter your answer as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Net position changes by: $________