Question

You have a four-year financial instrument that will pay $106 in year 1, $215 in year 2, $300 in year 3, and $428 in year 4. If the appropriate discount rate is 17% p.a., find the duration of this instrument.

Answer 1

Period	Cash Flow from Bond	Discounting factor = 1/(1+R)^N	PV of the cash flows = Cash flow x Df	Weighted cash flow = Period x Cash flow	Present value of weighted cash flow = Weighted Cash flow x Df
N	CF	Df = 1/(1+17%)^N	PV = CF x Df	WCF = CF x N	WPV = WCF x Df
1	106.00	0.8547	90.5983	106.0000	90.5983
2	215.00	0.7305	157.0604	430.0000	314.1208
3	300.00	0.6244	187.3112	900.0000	561.9335
4	428.00	0.5337	228.4022	1712.0000	913.6089
		Total = P = Price =	663.3721	Total = Weighted Price = WP	1880.2615

Duration or Macaulay Duration = WP/P

Duration or Macaulay Duration = 1880.2615/663.3721

Duration or Macaulay Duration = 2.834399427

Duration or Macaulay Duration = 2.834 years