A bank has an average duration for its asset portfolio of 5.5 years.The bank has total assets of $1,000 million and total liabilities of $750 million.If this bank's leverage-adjusted duration gap is zero,what must be the duration of its liabilities portfolio?
A)7.33 years
B)4.125 years
C)7.5 years
D)5.5 years
E)None of the options is correct.

Question

Quizplus · Accepted Answer

The leverage-adjusted duration gap is calculated as the difference between the asset duration and the liability duration, multiplied by the leverage ratio. In this case, the leverage ratio is 1,000 / 750 = 1.33. Therefore, the leverage-adjusted duration gap is (5.5 - duration of liabilities) * 1.33 = 0. Since the leverage-adjusted duration gap is zero, the duration of the liabilities portfolio must be 5.5 years.

A Bank Has an Average Duration for Its Asset Portfolio