(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.

Question

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Answer 1

Question

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

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You will be paying $10,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 8%.a. What is the present value and duration of your obligation?b. What maturity zero-coupon bond would immunize your obligation? c. Suppose you buy a zero-coupon bond with value and duration equal to your obligation. Now suppose that rates immediately increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation?d. What if rates fall immediately to 7%?

Assume you will be paying $10,000 per year in tuition expenses at the end of each of the next two years. Bonds currently yield 8%. a) What is the present value and duration of your obligation? b) What maturity zero-coupon bond would immunize your obligation? c) Suppose you buy a zero-coupon bond with value and duration equal to that of your obligation. Now suppose that interest rates immediately increase to 9%. What happens to your net position, that is, to the difference between the value of the bond and that of your tuition obligation? d) What happens to your net position if rates instead fall to 7%?

An insurance firm needs to make a payment of $10000 in 3 years, the market interest rate to discount this obligation is 1%. The insurance firm funds this obligation with a 4-year zero-coupon bond and a 2-year coupon bond with a coupon rate of 10% (The coupon payments are made annually). Both bonds have a face value of $1000 and a yield of 1%. What is the price of the 2-year coupon bond? What is the duration of the 2-year coupon bond? What is the portfolio weight on the 2-year coupon bond to immunize the insurance firm’s obligation? How much money should the firm invest in the 2-year coupon bond? Assume one year has passed, the firm needs to rebalance its portfolio to make sure its obligation is still immunized. Assume the market interest rate and the yields do not change. What is the duration of the 2-year coupon bond? What is the portfolio weight on the 2-year coupon bond to immunize the insurance firm’s obligation? How much money should the firm invest in the 2-year coupon bond?

Answer 2

Question

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

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 3

Question

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

Expert Solution & Answer

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Answer 4

Question

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

Expert Solution & Answer

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Check out a sample textbook solution

See solution

Answer 5

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

Answer 6

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.

Answer 7

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.

Answer 8

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.

Answer 9

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.

Answer 10

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

Answer 11

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

Answer 12

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

Answer 13

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

Answer 14

Expert Solution & Answer

Answer 15

Expert Solution & Answer

Answer 16

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Answer 17

Ch. 16 - Prob. 1PS Ch. 16 - Prob. 2PS Ch. 16 - Prob. 3PS Ch. 16 - Prob. 4PS Ch. 16 - Prob. 5PS Ch. 16 - Prob. 6PS Ch. 16 - Prob. 7PS Ch. 16 - Prob. 8PS Ch. 16 - Prob. 9PS Ch. 16 - Prob. 10PS

(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.

Solution Summary: The author explains the present value of obligation and duration of tuition fee obligation. The time period at which zero coupon bonds immunize is 1.49 years.

Videos

(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.

(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.

(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

(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

Want to see the full answer?

Chapter 16 Solutions

(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.

Solution Summary: The author explains the present value of obligation and duration of tuition fee obligation. The time period at which zero coupon bonds immunize is 1.49 years.

Videos

(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.

(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.

(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

(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

Want to see the full answer?

Chapter 16 Solutions

(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.

(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.

(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

(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