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Question 3 You will be paying $10,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 4%. In order to compute the present value and the duration of the obligation, we conduct the following calculations:  Period Time until payment Payment Payment discounted at 4% weight Time x weight (t) (CFt) PMT/(1 + y/m)t (wt = discounted pmt/P) (t)(wt) 1 1.0$10,000 9615.3846 0.5098 0.5098 2 2.0 $10,000 9245.5621 0.4902 0.9804 Column Sums$18,860.95 1 1.4902 (1) What is the present value and duration of your obligation? (2) What maturity zero-coupon bond would immunize your obligation? (3) Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase to 5%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation? What if rates fall to 3%?
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