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Explanation:
The Weighted Average Life (WAL) is calculated as the weighted average time until principal repayments are made. For a standard amortizing loan without prepayments, the principal payments are fixed in the amortization schedule. Therefore, the WAL is completely independent of the yield or discount rate. An increase in yield will not affect the WAL, making statement D false. Statement A and C are correct based on the sums provided in the table.
| Function: | IPMT | PPMT | PMT | c/(1+y)^t | t*b/L | t*d/L |
|---|---|---|---|---|---|---|
| Variable: | (t) | (a) | (b) | (c) | (d) | (e) |
| 1 | $60,000 | $75,868 | $135,868 | $128,177 | 0.08 | 0.13 |
| 2 | $55,448 | $80,420 | $135,868 | $120,922 | 0.16 | 0.24 |
| 3 | $50,623 | $85,245 | $135,868 | $114,077 | 0.26 | 0.34 |
| 4 | $45,508 | $90,360 | $135,868 | $107,620 | 0.36 | 0.43 |
| 5 | $40,086 | $95,782 | $135,868 | $101,528 | 0.48 | 0.51 |
| 6 | $34,340 | $101,528 | $135,868 | $95,782 | 0.61 | 0.57 |
| 7 | $28,248 | $107,620 | $135,868 | $90,360 | 0.75 | 0.63 |
| 8 | $21,791 | $114,077 | $135,868 | $85,245 | 0.91 | 0.68 |
| 9 | $14,946 | $120,922 | $135,868 | $80,420 | 1.09 | 0.72 |
| 10 | $7,691 | $128,177 | $135,868 | $75,868 | 1.28 | 0.76 |
Sum: $1,000,000 | 5.98 | 5.02 |
Each of the following statements is true EXCEPT, which is false?
A
The Macaulay duration is 5.02 years
B
If the yield increases to 7.0%, the Macaulay duration will increase to 5.09 years
C
The weighted average life (WAL) is 5.98 years
D
If the yield increases to 7.0%, the WAL will increase to 6.05 years
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