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

Present value of obligation is $17,942.94

Duration 1.4785 years

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

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