You have an investment that in today's dollars returns 15% of your investment in year 1,12% in year two,9% in year 3 and the remainder in year 4.What is the duration of this investment?

Question

Quizplus · Accepted Answer

To find the duration of investment we need to use the following formula:

Duration = [(CF1*1) + (CF2*2) + (CF3*3) + (CFn*n)]/ Investment

Where CFn is the cash flow at time n.

Using the formula, we get:

Duration = [(0.15*1) + (0.12*2) + (0.09*3) + (1-x)*4]/1

where x is the cash flow in the fourth year.

Solving for x, we get:

x = 0.47

So the cash flow in the fourth year is 47%.

Substituting this value into the formula, we get:

Duration = [(0.15*1) + (0.12*2) + (0.09*3) + (0.47*4)]/1 = 3.22 years.

Therefore, the best choice is C, with a duration of 3.22 years.

You Have an Investment That in Today's Dollars Returns 15