A portfolio consists of two types of loans. The first is a $30 million loan...
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Finance
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 $40 million is due in 3 years. Assume that the current interest rate is 9%.
Complete the following table to compute the duration of the second loan.
Note: You may copy the table, paste it on your Word document and complete it.
Year
1
2
3
Sum
Cash payments ($million)
3.60
3.60
43.60
-
Present value (PV) of cash payments ($million)
Weighted PV (%)
Weighted maturity (years)
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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