Duration Problems Fin303 2015

Duration:

1) You have a planning horizon of 15 years and wish to immunize your investment over that horizon. To do so, you have two financial instruments available: A and B. Instrument A has a duration of 2 years, and instrument B has a duration of 20 years. Find the proportion of your money that you need to invest in each of these instruments in order to achieve your immunization goal.

Duration Problems Fin303 2015

2) You have a five-year financial instrument that will pay $100 in year 1, $200 in year 2, $300 in year 3, $400 in year 4, and $500 in year 5. If the appropriate discount rate is 12% p.a., find the duration of this instrument.

Duration Problems Fin303 2015

3) You just bought a peculiar 60-year financial instrument whose annual cash flows grow exponentially as follows: C1 = $2, C2 = $22, C3 = $23,..., C60 = $260. If the appropriate discount rate is 100% p.a., find the duration of this instrument.

4) The assets of a bank have duration of 3 years, and its liabilities have duration of 4 years. What is the proportion of debt-to-assets that will immunize this banks equity?

5) A bank has $1,000 in assets, $900 in liabilities, and $100 in equity. The assets duration is 5 years. What must be the duration of the banks liabilities in order for the banks equity to be immunized?