1. A borrower has a loan of $100,000 repaid with level annual payments at the...
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1. A borrower has a loan of $100,000 repaid with level annual payments at the end of each year for 20 years at ana effective rate of 8%. The borrower can renegotiate or prepay the loan at any time without penalty. At the time the tenth regular payment is made. If the market interest rate rises, the borrower will still repay the loan originally scheduled. However, if it falls the borrower will repay the loan with five level annual payments at the end of each of the following year. Assume a 1% increase and 1% decrease in interest rate a) Calculate effective duration b) Calculate effective maturity 1. A borrower has a loan of $100,000 repaid with level annual payments at the end of each year for 20 years at ana effective rate of 8%. The borrower can renegotiate or prepay the loan at any time without penalty. At the time the tenth regular payment is made. If the market interest rate rises, the borrower will still repay the loan originally scheduled. However, if it falls the borrower will repay the loan with five level annual payments at the end of each of the following year. Assume a 1% increase and 1% decrease in interest rate a) Calculate effective duration b) Calculate effective maturity
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