A one-year, $100,000 loan carries a coupon rate and a market interest rate of 12 percent. The

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A one-year, $100,000 loan carries a coupon rate and a market interest rate of 12 percent. The loan requires payment of accrued interest and one-half of the principal at the end of six months. The remaining principal and the accrued interest are due at the end of the year.

a. What will be the cash flows at the end of six months and at the end of the year?

b. What is the present value of each cash flow discounted at the market rate?

What is the total present value?

c. What proportion of the total present value of cash flows occurs at the end of six months? What proportion occurs at the end of the year?

d. What is the duration of this loan?

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Akshay Agarwal

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