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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
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. Year Cash payments (Smillion) Present value (PV) of cash payments (Smillion) Weighted PV (%) Weighted maturity (years) 1 3.60 2 3.60 3 43.60 Sum b. 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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