Final answer:
To calculate the present value of future tuition payments, the present value formula and discounting by the market interest rate are applied. The bond example shows how payments are discounted, and if interest rates rise, causing the bond's present value to decrease. The calculation involves present values and timing of each cash flow.
Step-by-step explanation:
The student asks about calculating the present value and duration of tuition expenses, considering a certain bond yield percentage. To determine the present value of tuition expenses that are due at the end of the next two years with a bond yield of 9%, we can use the present value formula which accounts for the time value of money. The duration gives the weighted average time until cash flows from a bond are received and would require the calculation of the present values and timing of each cash flow.
For example, if a two-year bond has a face value of $3,000 and pays a yearly interest of 8%, the yearly interest payment is $240 (8% of $3,000). The present value of these payments would be calculated by discounting them by the market interest rate. For instance, if the market interest rate is 8%, the bond's present value would be the sum of $240 discounted one year at 8% and $3,240 (the interest plus principal) discounted two years at 8%. Should the market interest rate increase to 11%, the discount rate changes, and the calculations would need to be adjusted accordingly, resulting in a lower present value.