Question

Assets

300 million 30 day t bill

550 million 90 day t bill

700 million 2 year t notes

180 million 180-day muni

Liablities

1,150 million 14 day repo

560 1 year commercail

20 milion equity

What is the leverage-adjusted duration gap?
A 0.605 years.
B. 0.956 years.
C. 0.360 years.
D. 0.436 years.
E. 0.189 years.

Show work. I think the answer is a

Answer 1

LADG = DA - DL × K

Where,

LADG: Leverage adjusted duration gap

DA duration of assets

DL duration of liabilities

K: market value of liabilities/market value of assets

Duration of assets (in days)

Assume 1 year = 360days

DA = (300*30+550*90+700*2*360+180*180)/(300+550+700+180) = 343.87 days

Total assets = 300+550+700+180 = 1730 million

Duration of liabiilities (in days)

Assume 1 year = 360days

DL = (1150*14+560*1*360)/(1150+560) = 127.31 days

Total liabilities = 1150+560 = 1710 million

K = 1710/1730 = 0.988

LADG = 343.87 - 127.31*0.988 = 218.03 days

**equity is not included in liabilities as no interest is paid on equity