A bank has two 3-year commercial loans with a present value, Ask an Expert

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A bank has two, 3-year commercial loans with a present value of $70 million. The first is a $30 million loan that requires a single payment of $37.8 million in 3 years, with no other payments until then.

The second is for $40 million. It requires an annual interest payment of $3.6 million. The principal of

$40 million is due in 3 years.

a. What is the duration of the bank’s commercial loan portfolio?

b. What will happen to the value of its portfolio if the general level of interest rates increased from 8% to 8.5%?

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