Question

You will be paying $11,200 a year in tuition expenses at the end of the next two years. Bonds currently yield 6%.

a. What is the present value and duration in years of your obligation? (Do not round intermediate calculations. Round "Present value" to 2 decimal places and "Duration" to 4 decimal places.)

Present Value?

Duration in Years?

b. What maturity zero-coupon bond would immunize your obligation? (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Face value" to 2 decimal places.)

Duration in years?

Face value?

c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. 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? (Do not round intermediate calculations. Input the amount as a positive value. Round your answer to 2 decimal places.)

Net position ______ in value by _______?

d. What if rates fall immediately to 4%? (Do not round intermediate calculations. Input the amount as a positive value. Round your answer to 2 decimal places.)

Net position ______ in value by _______?

SHOW IN EXCEL WITH FORMULAS

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

? v u 1x ENG 01:12 06-03-2020 24 fx X B I B BK BL BM BN BO BP BQ - RATE 6% BH529 BH 512 513 514 515 516 a 517 518 519 TIME т 1 EXPENSES PV FACTOR @ 6% PV OF EXEPENSES A*B 11200 0.9433962 1 0566.04 11200 0 .8899964 9967.96 20533.9979 WEIGHT DURATION T*C 0.5146 0.5146 0.4854 0.9709 1.0000 1.4854 PRESENT VALUE DURATION 20534.00 1.4854 YEARS 523 DURATION FACE VALUE 1.4854 YEARS DURATION SHOULD BE SAME AS THAT OF PRSENT VALUE OF EXPENSES 22390.50 (=BL520*((1+BJ513)^BN520)] 525 b 526 527 528 532 533 534 535 536 ... convexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bond portfolio WACC RESI DIV POLI ... ►

v 1* 01:18 : ENG 06-03-2070 24 BN529 fix BI BJ B K BL BM BN BO BP BQ 529 530 C 8% INTEREST RATE INCREASES TO VALUE OF ZERO COUPON BOND = 531 19971.69 [=(BK526/(1+BK530)^BN520)] 532 533 535 PRESENT VALUE OF EXPENSES TIME EXPENSES PV FACTOR @8% PV OF EXEPENSES AB 1 11200 0.925926 10370.37 2 11200 0.857339 9602.19 19972.57 NET POSITION DECREASE IN VALUE BY 0.87 (=BL538-BL531] 4% INTEREST RATE DECREASES TO VALUE OF ZERO COUPON BOND = 21123.30 (=(BK526/(1+BK542)^BN520)] PRESENT VALUE OF EXPENSES TIME EXPENSES PV FACTOR @ 4% PV OF EXEPENSES AB 1 11200 0.9615385 10769.23 11200 0.9245562 10355.03 21124.26 550 551 552 553 NET POSITION DECREASE IN VALUE BY 0.96 (=BL550-BL543] ... CoNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bond portfolio WACC RESI DIV POLI...