Question

You will be paying $10,200 a year in tuition expenses at the end of the next two years. Bonds currently yield 9%. a. What is the present value and duration of your obligation

Answer 1

Present value of obligation is $17,942.94

Duration 1.4785 years

Step-by-step explanation:

Present value of obligation can be calculate by using following formula

PV = Tuition payment x ( 1 + yield rate )^-n

PV of First year payment = $10,200 x ( 1 + 9% )^-1 = 9,357.80

PV of Second year payment = $10,200 x ( 1 + 9% )^-2 = 8,585.14

PV of Obligation = PV of First year payment + PV of Second year payment

PV of Obligation = 9,357.80 + $8,585.14 = $17,942.94

Duration

Time in years PV of Payments Weight Duration (Time x Weight)

1 $9,357.80 0.5215 0.5215 x 1 = 0.5215

2 $8,585.14 0.4785 0.4785 x 2 = 0.9569

Total $17,942.94 1.0000 1.4785