Question
Mr. Wong has just been fired as CEO at the beginning of 2016. As consolation the board of directors give Mr. Wong a consulting contract
Mr. Wong has just been fired as CEO at the beginning of 2016. As consolation the board of directors give Mr. Wong a consulting contract that pays him $1,500,000 at the end of each year for 5 years.
(a) What is the duration of this contract if Mr. Wong's personal discount rate is 9%?
(b) What is the change in the contract's present value for a 0.5% increase in Mr. Wong's discount rate?
(c) Use duration to calculate the change in the contract's present value for a 0.5% increase in Mr. Wong's discount rate? How is the answer different from that in part (b)?
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