Suppose you will go to graduate school for 3 years beginning in year 3. Tuition is...

Suppose you will go to graduate school for 3 years beginning in year 3. Tuition is $27,441 per year, due at the end of each school year. What is the Macaulay duration (in years) of your grad school tuitions? Assume a flat yield curve of 0.04.

Assume annual compounding. In the above description, if you see a flat yield curve of 0.08 for example, then it means that the yield at all maturities is 8%.

Solutions

Expert Solution

The Value of Tuitions in year 2 =PMT*((1-(1+r)^-n)/r) =27441*((1-(1+0.04)^-3)/0.04) =76151.2730
Value of Tuitions today =76151.2730/(1+r)^n =76151.2730/(1+0.04)^2 =70406.13258
Macaulay Duration =(3*27441/(1.04)^3+4*27441/(1.04)^4+5*27441/(1.04)^5)/70406.13258 =3.97 years.

jeff jeffy answered 2 years ago

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