a. Calculate the leverage-adjusted duration gap of an FI that has assets of $2.3 million invested in 30-year, 9 percent semiannual coupon Treasury bonds selling at par and whose duration has been estimated at 10.07 years. It has liabilities of $1,030,000 financed through a two-year, 6.00 percent semiannual coupon note selling at par with a duration of 1.9143. b. What is the impact on equity values if all interest rates fall 10 basis points-that is, AR/(1+R/2) = -0.0010?

a. Calculate the leverage-adjusted duration gap of an FI that has assets of $2.3 million invested in 30-year, 9 percent semiannual coupon Treasury bonds selling at par and whose duration has been estimated at 10.07 years. It has liabilities of $1,030,000 financed through a two-year, 6.00 percent semiannual coupon note selling at par with a duration of 1.9143. b. What is the impact on equity values if all interest rates fall 10 basis points-that is, AR/(1+R/2) = -0.0010?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.

Question

Consider the following.
a. Calculate the leverage-adjusted duration gap of an FI that has assets of $2.3 million invested in 30-year, 9 percent semiannual
coupon Treasury bonds selling at par and whose duration has been estimated at 10.07 years. It has liabilities of $1,030,000 financed
through a two-year, 6.00 percent semiannual coupon note selling at par with a duration of 1.9143.
b. What is the impact on equity values if all interest rates fall 10 basis points-that is, AR/(1+ R/2) = -0.0010?
(For all requirements, do not round intermediate calculations. Round your answers to 2 decimal places. (e.g., 32.16))
a. Leveraged adjusted duration gap
b. Change in net worth using leveraged adjusted duration gap
years

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