Question 1 (20 points): Suppose Financial Institution A invests $1 million in a 20-year, 10 percent semiannual coupon Tr

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Question 1 20 Points Suppose Financial Institution A Invests 1 Million In A 20 Year 10 Percent Semiannual Coupon Tr 1 (217.56 KiB) Viewed 31 times

Question 1 (20 points): Suppose Financial Institution A invests $1 million in a 20-year, 10 percent semiannual coupon Treasury bond selling at par. The duration of this bond has been estimated at 8 years. The assets are financed with equity and a $700,000, 2-year, 6.45 percent semiannual coupon capital note selling at par. (a) What is the leverage-adjusted duration gap of Financial Institution A? (b) What is the impact on equity value if the relative change in all market interest rates is an increase of 20 basis points? Note: The relative change in interest rate is AR/(1+R/2) = 0.0020. (c) What would the duration of the assets need to be to immunize the equity from changes in the market interest rates?