A pension plan is obligated to make disbursements of $2.3 million, $3.3 million, and $2.3 million...

Question:

A pension plan is obligated to make disbursements of $2.3 million, $3.3 million, and $2.3 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 11% annually.

Duration of Payments:

The duration of a stream of payments is the weighted average amount of time until the payments arrive. If the stream features one large payment at the beginning, the duration will be relatively small. If there is one large payment at the end, the duration will be relatively large.

Answer and Explanation: 1

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The Macaulay duration is equal to:

{eq}Macaulay \ duration = \frac{\sum_{t=1}^{n}t*PV_{t}}{\sum_{i=1}^{n}PV_{t}} {/eq}, where PVt is the present...

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