A bank has two 3-year commercial loans with a present value of $70 million. The first is a $30m loan that requires a single payment of $37.8 million in three years with no other payments until then. The second loan is for $40m. It requires an annual interest payment of $3.6m. The principal of $40m is due in three 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 increases from 8% to 8.5%?