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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%.

  1. 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)

  1. 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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