To calculate: The duration of liability after borrowing and lending market interest rate of 7.6 percent.
Duration: It is an object used in
Explanation of Solution
Calculation of duration
Year |
Present value ($) |
Relative value | Duration |
7 | 17,965.3360 | 0.2781 | 1.9472 |
8 | 16,696.4094 | 0.2584 | 2.0672 |
9 | 15,517.1091 | 0.2402 | 2.1618 |
10 | 14,421.1051 | 0.2233 | 2.2320 |
Total present value | 64,599.9596 | 1 | 8.4082 |
Table (1)
Working notes:
Calculation of present value for year 7,
Calculation of present value for year 8,
Calculation of present value for year 9,
Calculation of present value for year 10,
Calculation of relative value for year 7,
Calculation of relative value for year 8,
Calculation of relative value for year 9,
Calculation of relative value for year 9,
Calculation of duration year 7,
Calculation of duration year 8,
Calculation of duration year 9,
Calculation of duration year 10,
So duration of bond is 8.4082 years.
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Chapter 25 Solutions
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