A pension plan is obligated to make disbursements of $1.5 million, $2.5 million,

Question

A pension plan is obligated to make disbursements of $1.5 million, $2.5 million, and $1.5 million at the end of each of the next three years respectively. Find the duration of the plan's obligations if the interest rate is 9% annually. (Do not round intermediate calculations. Round your answer to 4 decimal places.) Duration years References eBook & Resources Worksheet Learning Objective: 11- 02 Compute the duration of bonds, and use duration to measure interest rate sensitivity O Type here to search Af

Explanation / Answer

Duration = 9.06/4.64 = 1.9530 years

Discount rate 9.0000% Cash flows*n Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow                              -   0                                            -                                           -                         1.500 1                                        1.38                                    1.38                       5.000 2                                        4.21                                    5.58                       4.500 3                                        3.47                                    9.06

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