You will be paying $11,000 a year in tuition expenses at the end of the next two years. Bonds currently yield 11%.
What maturity zero-coupon bond would immunize your obligation?
I found the duration, but am having trouble finding the face value.
Duration: 1.4739
Face Value: ?
To find the face value of the zero-coupon bond that will immunize your tuition expenses, you can use the formula for bond pricing:
Bond Price = Face Value / (1 + Yield) ^ Time
In this case, the bond's yield is 11% or 0.11 and the time is 2 years. We can substitute the known values into the formula and solve for the face value.
11,000 = Face Value / (1 + 0.11) ^ 2
To calculate the right side of the equation:
(1 + 0.11) ^ 2 = 1.2321
11,000 = Face Value / 1.2321
To find the face value, multiply both sides of the equation by 1.2321:
Face Value = 11,000 * 1.2321
Face Value = 13,552.10
Therefore, the face value of the zero-coupon bond needed to immunize your tuition expenses is $13,552.10.