Question
In: Finance
Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown...
Calculate the durations and volatilities of securities A, B, and C. Their cash flows are shown below. The interest rate is 6%. (Do not round intermediate calculations. Round "Duration" to 4 decimal places and "Volatility" to 2 decimal places.)
| Period 1 | Period 2 | Period 3 | Duration | Volatility | |
| A | 85 | 85 | 130 | years | |
| B | 65 | 65 | 210 | years | |
| C | 55 | 55 | 200 | years | |
Solutions
Expert Solution
For Security A:
| Period (t) | 1 | 2 | 3 | |||||
|---|---|---|---|---|---|---|---|---|
| Cash Payment (Ct) | 85 | 85 | 130 | |||||
| PV(Ct) at 6% |
|
|
|
PV =
|
||||
| Fraction value of Total Value [PV(Ct)/PV] |
|
|
|
|||||
| Year * Fraction of Total Value |
|
|
|
Total Duration =
|
||||
| Duration | 2.1093 | |||||||
| Volatility | 1.99 |
For Security B:
| Period (t) | 1 | 2 | 3 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Payment (Ct) | 65 | 65 | 210 | |||||||||
| PV(Ct) at 6% |
|
|
|
PV =
|
||||||||
| Fraction value of Total Value [PV(Ct)/PV] |
|
|
|
|||||||||
| Year * Fraction of Total Value |
|
|
|
Total Duration =
|
||||||||
| Duration | 2.3892 | |||||||||||
| Volatility | 2.25 |
For Security C:
| Period (t) | 1 | 2 | 3 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Cash Payment (Ct) | 55 | 55 | 200 | |||||||||
| PV(Ct) at 6% |
|
|
|
PV =
|
||||||||
| Fraction value of Total Value [PV(Ct)/PV] |
|
|
|
|||||||||
| Year * Fraction of Total Value |
|
|
|
Total Duration =
|
||||||||
| Duration | 2.4317 | |||||||||||
| Volatility | 2.29 |
jeff jeffy answered 1 year agoRelated Solutions
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