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Imagine a portfolio that consists of two types of loans. The first is a simple loan with the loan amount of $35 million, which will
Imagine a portfolio that consists of two types of loans. The first is a simple loan with the loan amount of $35 million, which will be redeemed in three years. The second is another $35 million loan that requires an annual interest payment of $2.8 million.
- Fill in the following table to compute the duration of the second loan.
Year | 1 | 2 | 3 | Sum |
Cash payments ($million) |
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Present value (PV) of cash payments ($million) |
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Weighted PV (%) |
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Weighted maturity (years) |
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b. Compute the duration of the portfolio.
c. Compute the change in the value of the portfolio if the general interest rate rises from 3% to 5.5%?
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