Question

A pension plan is obligated to make disbursements of $6 million,
$4 million, and $3 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 13.0% annually. |

Duration | years |

Answer #1

Duration of plan | Present value of cash flow/(PV of cash flow*t) | ||||

In million | |||||

Time (t) | Cash flow | Discount factor @ 13% | Present value (Cash flow*Discount factor) | PV of cash flow*t | |

1 | $6.00 | 0.88496 | $5.31 | $5.31 | |

2 | $4.00 | 0.78315 | $3.13 | $6.27 | |

3 | $3.00 | 0.69305 | $2.08 | $6.24 | |

Total | $10.52 | $17.81 | |||

Duration | 17.81/10.52 | ||||

Duration | 1.6930 | ||||

Thus, duration is 1.6930 years |
|||||

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