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Example: Cash flows of $100 1 year from now and $100 3 years
from now with k = 8% have present values given by 100/1.08 =
$92.59 and 120/1.08^3 = $79.38. The weighted average number of
years = (1*92.59 + 3*79.38)/(92.59+79.38) = 330.73/171.97 =
1.923. The duration of these cash flows is 1.923 years. Note that
the present value of a zero coupon bond paying $200 1.923 years
from now is $172, the same as the two $100 payments.
How are durations of many items combined into an average duration?
Example computation
Example problem