An FI is planning the purchase of a $4 million loan to raise the existing average duration of its assets from 4.8 years to 6.3 years. It currently has total assets worth $20 million, $4 million in cash (0 duration), and $16 million in loans. All the loans are fairly priced.   a-1. Assuming it uses the cash to purchase the loan, calculate the duration of the existing loan.  a-2. Assuming the FI uses the cash to purchase the loan and that the loan has a 8.3 year duration, calculate the resulting duration of the asset portfolio.  a-3. Should it purchase the loan if its duration is 8.3 years? b. What asset duration loans should it purchase in order to raise its average duration to 6.3 years?

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
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An FI is planning the purchase of a $4 million loan to raise the existing average duration of its assets from 4.8 years to 6.3 years. It currently has total assets worth $20 million, $4 million in cash (0 duration), and $16 million in loans. All the loans are fairly priced.
 
a-1. Assuming it uses the cash to purchase the loan, calculate the duration of the existing loan. 
a-2. Assuming the FI uses the cash to purchase the loan and that the loan has a 8.3 year duration, calculate the resulting duration of the asset portfolio. 
a-3. Should it purchase the loan if its duration is 8.3 years?
b. What asset duration loans should it purchase in order to raise its average duration to 6.3 years? 

 

a-1. Duration
a-2. Duration
years
years
a-3. Should it purchase the loan if its duration is 8.3 years?
b.
Duration
years
Transcribed Image Text:a-1. Duration a-2. Duration years years a-3. Should it purchase the loan if its duration is 8.3 years? b. Duration years
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