Question 2

Consider the following cash flow

Year (t) CF(t)

0 -6000

1 250

2 3000

3 1000

4 4000

Assume a reinvestment rate of 5%.

1. Determine the FMRR using the above reinvestment rate. (15 points)

2. Determine the Duration (15 points)

3. Using the formula in our notes, show that FMRR can be derived using duration.