A portfolio consists of two types of loans. The first is a $30 million loan that requires a single payment of $37.8 million in 3 years, with no other payments until then. The second loan is for $40 million. It requires an annual interest payment of $3.6 million. The principal of $40 million is due in 3 years. Assume that the current interest rate is 9%. . Complete the following table to compute the duration of the second loan. Note: You may copy the table, paste it on your Word document and complete it. Year 1 3. Sum Cash payments 3.60 3.60 43.60 - ($million) Present value (PV) of cash payments ($million) Weighted PV (%) Weighted maturity (years) 1. Compute the duration of the portfolio. c. What will happen to the value of the portfolio if the general level of interest rate increases from 9% to 9,5%?
A portfolio consists of two types of loans. The first is a $30 million loan that requires a single payment of $37.8 million in 3 years, with no other payments until then. The second loan is for $40 million. It requires an annual interest payment of $3.6 million. The principal of $40 million is due in 3 years. Assume that the current interest rate is 9%. . Complete the following table to compute the duration of the second loan. Note: You may copy the table, paste it on your Word document and complete it. Year 1 3. Sum Cash payments 3.60 3.60 43.60 - ($million) Present value (PV) of cash payments ($million) Weighted PV (%) Weighted maturity (years) 1. Compute the duration of the portfolio. c. What will happen to the value of the portfolio if the general level of interest rate increases from 9% to 9,5%?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A portfolio consists of two types of loans. The first
is a $30 million loan that requires a single payment
of $37.8 million in 3 years, with no other payments
until then. The second loan is for $40 million. It
requires an annual interest payment of $3.6
million. The principal of $40 million is due in 3
years. Assume that the current interest rate is 9%.
a. Complete the following table to compute the
duration of the second loan.
Note: You may copy the table, paste it on
your Word document and complete it.
1
Year
2
3.
Sum
Cash payments 3.60 3.60 43.60
($million)
Present value
|(PV) of cash
payments
($million)
Weighted PV
|(%)
Weighted
maturity (years)
a. Compute the duration of the portfolio.
c. What will happen to the value of the portfolio if
the general level of interest rate increases from 9%
to 9.5%?
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