You manage a pension fund, and your liabilities consist of three payments as follows: Time Payment...

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You manage a pension fund, and your liabilities consist of three payments as follows: Time Payment...

You manage a pension fund, and your liabilities consist of three payments as follows:

Time	Payment
5 years	5 million
10 years	10 million
30 years	30 million

The term structure is currently flat at 10%

a) Compute the present value of your liabilities.

b) Compute modified duration of your liabilities.

business finance

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Answer 1

Answer #1

a.

Present Value = 5/(1.10)⁵ + 10/(1.10)¹⁰ + 30/(1.10)³⁰

Present Value = $8.68 million

b.

Macaulay Duration = [(5)5/(1.10)⁵ + (10)10/(1.10)¹⁰ + (30)30/(1.10)³⁰](8.68)

Macaulay Duration = (15.52 + 38.55 + 51.58)/8.68

Macaulay Duration = 12.17 years

Modified Duration = 12.17/(1.10)

Modified Duration = 11.07 years

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Answer 2

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