Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year.
-What is the leverage-adjusted duration gap?
A)0.605 years.
B)0.956 years.
C)0.360 years.
D)0.436 years.

Question

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year.  
-What is the leverage-adjusted duration gap?
A)0.605 years. 
B)0.956 years. 
C)0.360 years. 
D)0.436 years.

Quizplus · Accepted Answer

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Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. The leverage-adjusted duration gap is calculated as the difference between the duration of the assets and the duration of the liabilities, multiplied by the leverage ratio. In this case, the duration of the assets is 1.5 years, the duration of the liabilities is 0.9 years, and the leverage ratio is 0.6. Therefore, the leverage-adjusted duration gap is (1.5 - 0.9) * 0.6 = 0.605 years.

Third Duration Investments Has the Following Assets and Liabilities on Its