contestada

You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment?

Respuesta :

Answer:

Duration = 3.22 years

Explanation:

The duration will be based on weighted average of the bond return.

As provided return is as follows:

Year 1 = 15%

Year 2 = 12%

Year 3 = 9%

Year 4 = 100 - 15 - 12 - 9 = 64%

Accordingly, weighted average shall be:

Duration           Return             Weighted Average = D [tex]\times[/tex] R

1                          15%                      0.15

2                          12%                      0.24

3                            9%                      0.27

4                            64%                    2.56

Total weighted average = 3.22 years

Standard Duration = 3.22 years