39.) A 3-year fixed payment loan has an annual payment of $906. The interest rate for...

39.) A 3-year fixed payment loan has an annual payment of $906. The interest rate for the loan is 7.7%. What is the duration (in years) of the fixed-payment loan? Round your answer to at least 2 decimal places.

Solutions

Expert Solution

Duration measures the sensitivity to changes in interest rate. It is generally used for bonds and the higher the duration, the greater is the sensitivity of bond price for a change in interest rate.

We calculate duration as follows :-

were, PV = Present Value

t = time

n = number of periods

The denominator is the formula for Current Price of the bond.

The given loan has fixed cash flow of $ 906 for 3 years and interest rate of loan is 7.7% i.e, the discounting factor will be caculated at the rate of 7.7%.

Discounting Factor = 1 / (1+r)n

Present Value = Cash Flow * Discounting Factor

Present value * t = Present Value * Year

Thus,

Duration = 1.95 years

Thus, duration of the fixed payment loan is 1.95 years.

jeff jeffy answered 4 months ago

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