Question

1) Suppose you will go to graduate school for 3 years beginning in year 5. Tuition...

1) Suppose you will go to graduate school for 3 years beginning in year 5. Tuition is $25,109 per year, due at the end of each school year. What is the Macaulay duration (in years) of your grad school tuitions? Assume a flat yield curve of 0.03.

Assume annual compounding. In the above description, if you see a flat yield curve of 0.08 for example, then it means that the yield at all maturities is 8%.

Homework Answers

Answer #1

Duration = (Present value of a Future cash flows * Year of receipt )/ Present value of a Future cash flows

Year PVF @ 3% Cash Flow PV of Cash flow Present value of a Cash flows * Year of Reciept
A B C B*C C*A
5 0.8626 $        25,109 $ 21,659.24 $ 108,296.22
6 0.8375 $        25,109 $ 21,028.39 $ 126,170.35
7 0.8131 $        25,109 $ 20,415.91 $ 142,911.40
Sum $ 63,103.55 $ 377,377.97
Duration =   $63,103.55 / $377,377.97 = 5.98 Years
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